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  • "The Plan, Stan—Moving Forward on a Futures Insurance Fund"

    Statement of Commissioner Bart Chilton on the Futures Investor and Customer Protection Act (FICPA) Proposal

    August 9, 2012

    Last November, in the wake of the MF Global debacle, I called for a futures insurance fund. It made no sense to me that banking customers had insurance (up to $250,000) through the Federal Deposit Insurance Corporation (FDIC) and that security customers had similar protections up to $500,000 through the SIPC Fund. The support for such a futures insurance fund, at the time, was essentially zero. Nobody said they liked it. A few folks said they didn't like it. Perhaps it would only encourage risky behavior by firms if they knew there was insurance, one Member of Congress suggested to me. That's a good point, which is why such a fund (if it were to exist) should never pay out for trading losses or losses as a result of a downturn in the economy. Some suggested, without much detail, that such a fund for futures customers would be excessively expensive. I don't agree, and ask those who lost money if they would have wanted such a fund and there will be unanimity support of such a concept.

    While I kept discussing the need for the fund, hardly anyone said "boo" about it. Then in July came the collapse and apparent fraud of Peregrine.  Hundreds of millions of dollars of customer money should never go “kaput.”  Now, it seems that this idea for a futures insurance fund has some traction. However, in order to actually get us moving down the road to a new law that provides for such a fund, I am today, putting forth a proposal for how Congress might craft such a new law.  Here it is:

    Futures Investor and Customer Protection Act (“FICPA”) Proposal

    Some nine months after the downfall of MF Global (“MFG”), many MFG futures customers are still waiting to be made whole while MFG securities investors were entitled to quick and efficient payouts by the Securities Investor Protection Corporation (“SIPC”).  My proposal, the Futures Investor and Customer Protection Act (“FICPA”), would merely seek to extend the already existent SIPC protections available for securities customers to futures customers.  The call for adopting a SIPC-like protection fund for the futures markets must be answered quickly: over $35 billion in futures customer property has been exposed to insolvency since the Financial Crisis.  FICPA, and the Futures Investor and Customer Protection Corporation (“FICPC”) it would create, would provide a safeguard fund for customers affected by FICPC involvement.  By drawing on an existing blueprint, the creation of FICPC would be a relatively simple task for legislators and FICPC administrators.  This would help remedy the present crisis of confidence in the futures markets in the wake of the fall of Peregrine Financial Group and MF Global.  The costs to fund and administer FICPC would be minimal relative to the benefits of enhanced customer confidence and protection.  Here’s how my plan would operate:

    • The establishment of a Futures Investor and Customer Protection Fund
    • to the FICPC Fund would be similar to the SIPC fallback fund in scope and protections and would provide futures customers with more efficient reimbursement of missing funds.  The initial collection for the fund would be taken from a fee assessed on all futures commission merchants (“FCMs”), which would under no circumstance exceed 0.5% of the merchants’ previous year gross revenue specific to futures. Determinations for setting assessment fees within the parameters statutorily established will be made by the FICPC Board.  I recommend that revenues generated from commercial hedging or end-user customers receive a discount for the purpose of collections in order to encourage FCMs to provide these customers access to futures markets.  After reaching its pre-determined target level, as determined by FICPC and the Board (never to exceed $2.5 billion), FICPC could lower or suspend premium collections.  Assets recovered by a FICPC trustee on behalf of a covered “Customer” would be used to replenish the FICPC fund.
    • FICPA would create a separate non-profit Corporation and a Board of Directors for Futures interests
    • FICPC would be controlled by an appointed three-member Board of Directors who would determine the policies that would govern the operations of the Corporation. These members would then be confirmed by a Senate majority vote.  The CFTC and FICPC would operate in a relationship similar to that of the SEC and SIPC established under SIPA. The operational expenses of FICPC would be minimal, and would initially consist of a staff not to exceed the current 34-employee total at SIPC.  It is my belief that a non-profit corporation separate from SIPC will best represent the concerns and interests of commodity and futures participants.
    • Futures Customers would have the right to file claims with a Trustee for priority treatment
    • customers impacted by the failures of their futures commission merchants would be able to file claims with a trustee.  Trustees would have the power to transfer customer accounts to solvent FCMs or to liquidate them.  Claimants would have to demonstrate that they qualify as a “Customer,” to be narrowly-defined and interpreted to mean something analogous to “Customer” under SIPA. For example, customer losses tied to market downturns would not meet the burden for priority treatment under FICPA.  Unlike SIPA, which caps customer claims at $500,000 per account, FICPA would be limited to $250,000 in futures liquidation value and cash.

    So, that's the plan, Stan. Or at least, that is a plan, which is more than existed before today.

    I look forward to a lively discussion about the proposal, and other proposals that might be forthcoming. The point is to go forward and provide better customer protection. I hope this proposal assists in that endeavor.

    Last Updated: August 9, 2012



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