Concurring Statement of Commissioner Scott D. O'Malia regarding the Proposed Customer
October 23, 2012
In response to the Peregrine and MF Global failures, the Commission has proposed a new set of rules to enhance the level of protection afforded customers of the futures markets. In particular, the proposal calls for FCMs to maintain adequate capital in their customer accounts to ensure customers are not bearing the credit risk of their fellow customers, implement controls around the risks specific to a particular FCM's business, increase the level of disclosures provided to customers, and create an independent segregation account balance verification system. While these measures are a good start, I believe that it is essential to focus on a comprehensive technological solution that goes beyond what the Commission has proposed in this release. Technology can be a cost effective oversight tool for both customers and the Commission to enhance transparency and improve risk management. Improving our capacity to monitor money flows can serve as a significant deterrent against fraudulent behavior.
I encourage industry participants to voice their opinion as to how the proposals put forth today can be improved upon. Specifically, what technological solutions can be employed to facilitate the dissemination of information about FCMs to their customers so that they may "know their FCM"? How can firms implement the new capital requirements in the most cost effective manner? What is the best method for an FCM to monitor its level of risk? I look forward to hearing from market participants on the most effective ways to implement the customer protection rules proposed by the Commission today.
I would also like to highlight one of today's proposals that will require additional development in order to fulfill the goal of customer protection. Today's proposal calls for the creation of an electronic balance confirmation process that would allow the Commission and Self-Regulatory Organizations ("SROs") to independently check the balance of each segregated account held on behalf of customers. While this can be used to aid in the surveillance of account balances, the Commission proposal only works on an individual basis and requires significant human involvement to log in and monitor individual accounts. What the industry needs is a fully automated system that allows the Commission and SROs to download the account balances for each segregated account held for a customer and compare that balance to the figures on record at each FCM. In response to the Peregrine and MF Global failures, industry participants discussed the implementation of such a system in July of this year during the Commission's Technology Advisory Committee (TAC) meeting. During the meeting, the TAC members present were virtually unanimous in their belief that an automated customer fund verification system was needed. Certain TAC members also made presentations discussing the technological hurdles that must be overcome in order to put such a system in place.
On October 30th we will have another TAC meeting during which SROs will update us on the status of this system's implementation and their estimates for when it will be fully operational. Only when this system is up and running can customers of the futures industry feel secure that their investments are in safe hands and properly monitored by both the Commission and SROs. This is an issue of utmost importance and requires collaboration on the part of the Commission, SROs and each and every Commission registrant. The end result of this process will provide customers with the assurance they need to continue investing in the derivatives markets.
I hope market participants will provide thoughtful recommendations to improve customer protections and deploy technology that is cost-effective to create and maintain. I also encourage market participants to provide specific data that the Commission can use to develop a robust cost benefit analysis.
Last Updated: October 23, 2012