Comment Text:
1/10/13
Mr. David Stawick, Secretary
Commodity Futures Trading Commission
1155 21st Street, N.W.
Washington, D.C. 20581
Re: Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations: (RIN3038-AD88)
Dear Mr. Stawick:
I am writing to encourage the CFTC to advocate for and adopt rules that would:
1. Require FCMs/RFEDs to segregate retail Forex customer funds in the U.S.
2. Make it impossible for one individual to control or access customer funds held in trust at an FCM/RFED.
3. Bring full market transparency and accountability to the Futures and Forex industries by requiring that firms publish a quarterly consolidated balance sheet and income statement.
4. Require all FCMs/RFEDs to employ a top ten accounting firm.
5. Mandate that all customers have the option to "opt out" of granting FCMs/RFEDs unfettered access to invest their customer funds while still allowing those customers to continue to trade.
6. Allow customer margin to be placed in an insured account and require an insurance program be put in place to protect customers from FCM/RFED insolvency and fraud.
7. Allow U.S. Treasury Notes, or other high-grade instruments, to be posted as margin collateral and held in the name of the customer.
REQUIRE FCMs/RFEDs TO SEGREGATE RETAIL FOREX CUSTOMER FUNDS IN THE U.S.
In 2008, retail online currency trading was formally regulated with the passage of the "Commodity Futures Trading Commission Reauthorization Act of 2008." This law required that non-bank firms offering retail foreign exchange trading to the general public be registered and licensed by the Commodities Futures Trading Commission as a Registered Foreign Exchange Dealer, or, "RFED." This law was a step in the right direction but it did not in any way grant customers trading FX with RFED's (of FCM's) any funds protection in the event of bankruptcy as is common in other markets such as equities and futures.
In particular, the Reauthorization Act did not make any adjustments to the CFTC's "segregation rule." The segregation rule stipulates that all client funds deposited for trading domestic, on exchange futures or options on futures be kept segregated from all company funds and that in the event of bankruptcy the customer's funds are legally segregated from creditors and must be returned to the clients. Because the segregation rule does not explicitly state that customer funds that are used to trade with RFED's be segregated in the same manner, these customers are in effect left completely unprotected.
As a result of this lack of protection, thousands of traders (myself included) have been left completely unprotected in the PFG Best bankruptcy. This would not be the case if my retail forex trading account were held with a broker in the United Kingdom, Canada or Hong Kong where customer funds are required to be segregated by local regulators. Unfortunately, regulations prevent a U.S. customer from opening such an account overseas. As such, I believe the CFTC should take the lead and push the Congress to require segregation of customer funds for the domestic retail forex industry.
MAKE IT IMPOSSIBLE FOR ONE INDIVIDUAL TO CONTROL OR ACCESS CUSTOMER FUNDS HELD IN TRUST AT AN FCM/RFED.
Ensure that one individual at an FCM/RFED no longer has direct and sole access to customer segregated funds such as in the case of PFG.
REQUIRE ALL FCMs/RFEDs TO PUBLISH A CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT ONCE A QUARTER.
Currently, the CFTC publishes monthly "Net Capital" reports that disclose to the public how much money a Futures Commission Merchant has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCMs and RFEDs to publish a quarterly consolidated balance sheet and income statement the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that these firms have.
Furthermore, the published statements should include everything (i.e. holding company's financials) since what happens to other subsidiaries of the company can easily affect the regulated FCM/RFED. Each company should be required to provide a link to this statement on its own homepage so that the public can do its proper due diligence.
Too often, those FCMs and RFEDs that are on the edge of insolvency lure customers in by marketing unsustainable offers (low commissions, account opening bonuses) that temporarily puts off the inevitable. If traders have access to a firm's income statement they will be able to see for themselves that these kinds of marketing gimmicks may not be producing revenue for the firm (or even leading to losses) and this will allow the trader to make a safer choice and also discourage firms from participating in uneconomical business practices.
REQUIRE ALL FCMs/RFEDs TO EMPLOY A TOP TEN ACCOUNTING FIRM.
There need to be much higher accounting standards than currently exist in the FCM/RFED world. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCMs and RFEDs. Whether it is top 10 or top 25, the main point is that FCMs must use a nationally recognized and respected accounting firm that could apply the same tough standards to FCMs and RFEDs that publicly traded companies must meet.
While no one proposal will guarantee that a future FCM or RFED will not fail, these proposals will enhance the public's due diligence capabilities by bringing greater market transparency and accountability to the world of futures/forex trading.
MANDATE THAT ALL CUSTOMERS HAVE THE OPTION TO "OPT OUT" OF GRANTING FCMs/RFEDs UNFETTERED ACCESS TO INVEST THEIR CUSTOMER FUNDS WHILE STILL ALLOWING THOSE CUSTOMERS TO CONTINUE TO TRADE.
There are still open issues stemming from a combination of the scope of investments that FCMs/RFEDs are permitted to make under the CFTC Reauthorization Act of 2008 and the permitted language in customer account agreements that grant FCMs/RFEDs unreasonably wide latitude to use and invest customer funds.
The language that is typically found in customer agreements permitting an FCM/RFED to use customer funds, at the FCM's/RFED's discretion, is buried deep within the agreement. In order to open a trading account with a particular FCM/RFED, all customers must comply with such a clause. This common clause skirts the spirit of the Act by granting wide latitude to the FCM/RFED to use customer funds, which the customer is required to post for initial and variable margin. Allowing an FCM/RFED unfettered use of customer funds without a mechanism for such funds to be guaranteed or insured exposes those customer funds to risk of loss.
Alternatively, or in conjunction with an "opt out" provision, the CFTC could consider further enhancements to customer protections that would provide FCMs/RFEDs with an incentive or some reasonable mechanism to negotiate and modify these terms of concern for those customers that elect not to grant such wide latitude as is represented by the clauses in customer agreements.
ALLOW CUSTOMER MARGIN TO BE PLACED IN AN INSURED ACCOUNT AND REQUIRE AN INSURANCE PROGRAM BE PUT IN PLACE TO PROTECT CUSTOMERS FROM FCM/RFED INSOLVENCY AND FRAUD.
The proposed enhanced customer protections do take a significant step towards reducing the risks of loss to customer accounts and potentially provide an early warning mechanism for alerting the CFTC, customers, and other oversight entities of the possibility that certain precarious issues may arise. However, regulations have failed to adequately protect customer funds by prohibiting parking margin in a security account that is otherwise insured by SIPC, a bank account that is otherwise insured by the FDIC or under a similar type of insurance program as required by other countries.
In order for the markets to function efficiently, Futures, commodity and Forex customers must have confidence and trust in the industry's financial safeguards. Specifically, in the absence of an insurance type of regime, market participants must have a level of trust and confidence that there will not be a repeat of the circumstances involved in the collapse of MF Global and PFG.
ALLOW U.S. TREASURY NOTES, OR OTHER HIGH-GRADE INSTRUMENTS, TO BE POSTED AS MARGIN COLLATERAL AND HELD IN THE NAME OF THE CUSTOMER.
This will skirt the entire bankruptcy issue by creating specifically identifiable property of the customer that is separate and excluded from FCM/RFED obligations.
CLOSING
There remain critical open issues in the CFTC's proposed changes that need to be addressed. In order for the market to operate efficiently there must be confidence and mutual trust, neither of which exists right now as a lasting result of the recent collapses of multiple FCMs. No one else should have to suffer the potential loss of funds from their accounts the way I and thousands of other traders have at PFG Best.
I appreciate the opportunity to comment on this matter.
Sincerely,
Luxman Sunder
Vael Asset Management
