Peregrine Financial Group filed for bankruptcy Tuesday afternoon following revelations that the brokerage firm misrepresented the amount of money its accounts designated to hold customer funds.
Roughly $220 million is missing, according to court documents filed by the Commodities Futures Trading Commission.
Just nine months after MF Global's downfall, the failure of another futures commodities merchant (FCM) has once again shaken faith in the regulation system that's supposed to protect futures users.
"The National Grain and Feed Association is very concerned there's been another FCM failure so soon after MF Global, and especially at a time when regulators presumably were keeping a closer eye on FCM finances," said Todd Kemp, NGFA treasurer and vice president of marketing.
After MF Global's bankruptcy, NGFA organized a task force to review the current guidelines on customer segregated funds and make recommendations to regulators about how to enhance customer protections.
In April, NGFA sent the House and Senate Agriculture committees its recommendations on ways to improve accountability and transparency among the regulatory bodies.
Those suggestions included increasing electronic reporting and requiring high-level personnel signatures on transfers of customer money among other things.
And just last week, NGFA submitted a proposal to the ag committees on a better way to segregate customer funds.
Under the current system, FCMs can invest segregated customer funds in a handful of approved investments, like treasury bills. All customers' funds are comingled.
Brokerages have to report the balances of their accounts to their regulatory agency, the NFA in this case, and to the CFTC.
NGFA wants FCMs to offer a fully segregated, voluntary account for holding collateral.
Clients have to opt-in, Kemp said, and it's likely the brokerages would add fees to this kind of segregation since they'd be losing out on some investment income.
Kemp also said the organization hopes a voluntary, fully segregated model would also "protect customers from pro-rated loss sharing like we had in the MF Global situation.
Now we think following through quickly on those recommendations is more important than ever.
We're really looking to see a full explanation from our regulators about just what happened at Peregrine."
On Tuesday, Senate Agriculture Committee Chairman Debbie Stabenow announced two hearings, one on July 17 to review the implementation of the Dodd-Frank financial reform legislation and one on Aug. 1 to address MF Global.
"It is absolutely imperative that there is accountability in the futures markets so customers can feel safe knowing their money is protected," Stabenow said in a statement.
"We are working closely with regulators to find out what happened because farmers and small businesses need assurances that their funds are safe from reckless or criminal activity.
Congress also has a responsibility to assess current customer protections and strengthen them where needed to put a stop to executives misusing customer funds in the future."
Source: Argentine Beef Packers S.A.
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