Last week, CFTC Commissioner Bart Chilton unveiled a plan to give futures intermediaries’ clients Securities Investor Protection Corporation-like protections via the creation of a Futures Investor and Customer Protection Fund. Similar to the SIPC Fund, this fund would be called the Futures Investor and Customer Protection Fund, and it would be funded by fees assessed to futures commission merchants.
The idea of setting up an insurance type fund for futures clients arose following the Commission’s recent allegations against Peregrine Financial Group Inc.-the SEC is accusing the futures commission merchants of misappropriating about $215 million in customer funds of about $220 million that was on deposit-and after MF Global Inc.’s bankruptcy filing last year revealed that several hundred million dollars in client funds had been misallocated and could not be withdrawn.
Unlike the securities industry, the futures industry has never provided financial protection coverage to customers who lose money because of illegal actions or bankruptcy. Instead, the protection has come from mandating that client funds and the intermediaries should always be kept separate, which was a structure that seemed to work until the incidents involving Peregrine Financial and MF Global occurred.
Chilton has said that, if approved, the Futures Investor and Customer Protection Act “would merely seek to extend” SIPC protections to futures clients. Pulling from this “existing blueprint” would make it easier to create the FICPC. He also believes that such a move would help restore confidence in the futures market.
However, unlike the SIPC, which has a $500,000 cap on client claims, the cap for futures customers for their claims to the proposed FICPC would be $250K in cash and liquidation value. Claimants would have to show that they qualify as “Customer” per the narrow definition, and they are therefore entitled to receive payment coverage.
A Futures Investor and Customer Protection Corporation board would be set up and its Senate-appointed members would determine how to calculate the fee that futures commission merchant would have to pay (not to go above .5% of an FCM’s gross revenue from futures activity during the last year). When the target amount, not to go over $2.5 billion, is reached, the board would suspend or reduce collection fees. That is, until a payment was made to a futures customer from the fund, in which case merchants would again put money in until that target amount was again met.
Like SIPC, the FICPC would be staffed by no more than 34 employees. The FICPC board would run the entity. The relationship between FICPC and CFTC would be similar to the one between between SIPC and SEC.
If you are an investor that suffered losses because of MF Global, Peregrine Financial, or any other futures commission merchant, contact one of our futures securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP to request your free case evaluation.
“The Plan, Stan-Moving Forward on a Futures Insurance Fund”, US Commodity Futures Trading Commission, August 9, 2012
Securities Investor Protection Corporation
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