July 26, 2012
I would like to thank all of the Technology Advisory Committee Members for their willingness to attend this meeting on short notice and to the presenters who have also rearranged their schedules to provide their expert views on the opportunity to develop technological solutions that will protect customer funds from fraud and misappropriation.
To state that the meltdown of two futures commission merchants (FCMs) within the last ten months has shaken public confidence is an understatement. The actions taken by the two firms are a complete and total betrayal of the public trust that have undoubtedly undermined investor confidence so much that an immediate and comprehensive overhaul of customer protection safeguards is required.
Since the failure of MF Global in October 2011, the Commission staff has been working on multiple rule changes to increase the oversight, reporting and compliance responsibilities for FCMs. I support reforms that will increase transparency, disclosure and independent verification of customer funds as well as subject FCM business practices to a higher level of public scrutiny1. In addition, I support reforming the bankruptcy code to ensure that the protection of customer money in court matches the rhetoric and promises found in press releases.
However, the reforms currently under consideration fail to close the existing regulatory gap that allows firms to self-report the status, balance and location of the customer funds. In my opinion, it is imperative for the industry to develop a technology solution that can verify customer balances held by the FCM, custodial banks and the clearing house. This system must be fully automated to draw feeds directly from the relevant entities to compare the balances. If balances do not match, then an automated alert should be sent to both the appropriate self-regulatory organization (SRO) and the Commission.
This solution must be 100 percent industry funded and maintained, and must be overseen by the Commission and relevant SROs.
I have called this emergency meeting for the expert witnesses to share their opinion about the feasibility of developing such a technological solution as well as consider other technology options that can verify customer funds, wherever they are located.
I hope the TAC Members will not hesitate to offer their suggestions, thoughts and opinions regarding today’s solutions.
Today’s discussion will be in two parts. First, we will hear from our panelists. The second half of the day will be spent discussing the solutions we will hear this morning.
We will first begin with Gary Barnett, Director of the Division of Swap Dealer and Intermediary Oversight, who will provide an overview of the draft rules that were recently circulated among the Commissioners.
After Mr. Barnett, I will ask Chris Hehmeyer, Chairman of the Board of the National Futures Association (NFA) to present solutions proposed by the NFA to protect customer funds.
Following Mr. Hehmeyer, we will hear from Bryan Durkin, the COO of CME Group about CME’s proposed customer protection reforms.
After that I will call on our two FCM representatives, Gerry Corcoran, President and CEO of RJ O’Brien and Michael Dawley, Managing Director from Goldman Sachs.
Next I will call on our technology providers, Chris Schellhorn, President of Capital Confirmation, and Allen Green, General Manager of Capital Markets for SunGard about the feasibility of developing a technology solution that will make completely transparent to the regulators the flow of customer money.
Finally, we will hear from Steve Hurst, CEO of Merchants Data Repository, who has proposed a third-party utility segregation model for consideration.
I fully expect today’s discussion to help the Commission make critical decisions about a technology-based fraud prevention system. Understanding what is needed, how soon it can be implemented and who must be connected are but a few questions I have for today’s panelists. I am also open to other suggestions to place customer funds outside an FCM. Regardless of where you put customer money; there must be a technology solution that will give customers certainty that their money is safe each and every day.
1 Scott. D. O’Malia, Commissioner, CFTC, Address at the Center on Financial Services Law, New York Law School: Where are We? And Where Should We Be? Thoughts on MF Global and High Frequency Trading (Jan. 31, 2012), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-11.
Last Updated: July 26, 2012