How to Protect Yourself from Another MF Global or PFGBEST
The wounds left by MF Global and PFGBEST on the commodity industry were deep, but there have been positive developments in their aftermath such as the potential for deposit insurance and improvements in the way regulators audit futures brokerage houses. Similarly, futures traders should take the lessons learned by these events to safeguard themselves from potential hardships.
Follow the FCM Financial Data Report
The Commodity Futures Trading Commission (CFTC) requires that FCMs regularly report the status of their customer segregated funds account to regulators. With the data collected, the CFTC publishes a monthly report on the financial data of each FCM. Reports leading up to the PFGBEST debacle were a painful reminder that data portrayed on the CFTC’s reports might not always be verified properly. However, this situation has largely changed. Government regulators now have electronic access to the customer segregated funds accounts of each commodity brokerage firm, for reliable and accurate real-time verification of funds.
The report includes information such as the total value of customer segregated deposits, whether the amount the brokerage firm has in the customer segregated funds account is enough to be compliant, and any excess or deficiency in the account. You might be wondering why an FCM would have more in its customer segregated funds account than its customers actually have on deposit. Cash inflows and outflows are constantly taking place as clients deposit and withdraw funds, buy and sell options and futures contracts, and pay brokerage fees. Plainly, the math isn’t quite as easy as one might think; instead of being a black-and-white figure, there is quite a bit of gray. Nonetheless, the regulations in place that require brokerage firms to segregate customer funds from their own worked flawlessly to protect client funds for decades before MF Global and PFGBEST infamously pilfered customer segregated funds accounts and changed the way the industry operates.
Spread Funds Among Multiple Brokers
Clients trading substantial sums of money might consider using more than one brokerage firm to clear trades with the exchange. Traders choosing to work with an Independent Introducing Broker (defined in Chapter 5) enjoy the luxury of having one individual broker service their trading accounts at multiple brokerage firms. This cuts down on the additional hassles of maintaining multiple accounts while providing clients the advantage of diversifying risk of a brokerage firm failure in which client segregated funds are tampered with. Accordingly, my experience in the PFGBEST debacle lead me to conclude such an arrangement is necessary for probable success as a commodity broker. Not surprisingly, I am now operating under an Independent Introducing Brokerage arrangement and therefore offer my clients access to several brokerage houses while still dealing exclusively with my firm.
Although the odds of another incident similar to those with MF Global or PFGBEST occurring are slim, having peace of mind is important. After all, if the unthinkable happens again, it certainly won’t occur at more than one firm at the same time.