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An Insurance Fund for Futures Customers on the Horizon?

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First it was the massive fraud committed at MF Global, where company trading losses were conveniently covered with client money — $1.6 billion to be exact — that will likely never be repaid. Then it was the Peregrine Financial Group debacle, the Madoff-like scandal that resulted in $200 million shortfall in customer accounts.

On the heels of these investment banking scandals, lawmakers are working to create an insurance fund for futures customers. Michael Dawley, chairman of the Futures Industry Association and managing director at Goldman Sachs’, has put his support behind the idea, claiming the Institute for Financial Markets should examine the plausibility of such a fund. Scott O’Malia, a Commodity Futures Trading Commission commissioner and chairman of the advisory committee has called the recent scandals a complete betrayal of public trust and called for “an immediate and comprehensive overhaul of customer protection safeguards.”

Speaking at a U.S. Senate committee hearing on MF Global and Peregrine’s collapse this month, CME Group President Terrence Duffy said raising money for such a fund might be too costly to the industry to be appealing.

And even if futures brokerages were willing to pitch in, customers might still be dissatisfied by the ultimate payback.

“Ask the folks that were investing with Mr. Madoff when he took $50 billion and SIPC gave them $2.5 billion in return,” he said, referring to infamous Ponzi schemer Bernard Madoff.

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“Ask those that lost money on MF Global or Peregrine if they wish they’d have had insurance.

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Of course they would,” he said in an email.

In essence, the futures insurance fund would protect customers’ money in the event of another MF Global or Peregrine event, acting similar to the Securities Investor Protection Corp, which guarantees securities investments up to $500,000 in the event a brokerage firm collapses. Just yesterday, leaders from the futures industry and futures customers gathered again to discuss the feasibility.

With no sign of the slowdown in banking scandals, it would make sense to create a safety net for customers. But it remains to be seen if all parties will agree to the cost of such an endeavor.

Risk Management Links of the Day: 12.17.09

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credit suisse sanctions 536 million

  • Forbes published a good piece on how Credit Suisse has aided clients from rogue nations like Iran, Cuba, Burma and Libya sidestep U.S. sanctions for nearly a quarter century, an infraction that will cost the Zurich bank $536 million for violating the the International Emergency Economic Powers Act as well as New York State law. “Credit Suisse first started dealing with rogue regimes that were sanctioned by the U.S. government in 1986, when the Zurich-based bank began to assist Libyan customers in evading sanctions by executing payment orders without stating their names, according to U.S. authorities. Later Credit Suisse started to refine its methods, processing payments for clients in sanctioned countries with payment messages that concealed the identity of customers by using false codes. Credit Suisse did this kind of business for other clients in countries that faced U.S. sanctions, including Sudan, Libya, Burma, Cuba, and Charles Taylor’s Liberia, the Treasury Department says.”
  • The SEC approves enhanced disclosure about risk, compensation and corporate governance. “The Securities and Exchange Commission today approved rules to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies. Beginning in the upcoming annual reporting and proxy season, the new rules will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made.”
  • RSA Insurance Group and the WWF (the environmental group, not the wrestling association that was renamed the WWE) began a three-year partnership that will center on conducting joint research efforts into all things Mother Nature and risky.
  • The percentage of commercial insurance buyers who have an exposure insured with Chartis has dropped from 90% in July to 80% now. Still a high number, but a significant drop. Although Barclays is saying that most of those who are still on board with the AIG insurance arm now plan to stay. “Of commercial buyers that insure with Chartis, Barclays said roughly 75% of those customers plan to stay with the unit despite AIG’s troubles, up sharply from 40% of customers who said they would stay with Chartis in July.”
  • A guy named TJ Sullivan who is CEO of CampusSpeak, Inc. has dubbed the crackdown on Greek life shenanigans on campus as “the risk management era.” He explains in more detail: “The emphasis was on rules and policy adherence. It dominated everything: chapter services strategies, fraternity education, volunteer training and duties, consultant training, board meetings, etc. Someone a lot smarter than I will write a book about this, and I’m sure opinions will vary on whether or not it was a good, important era, or a harmful one. Was there any net benefit? Some will say that fraternities and sororities grew stronger during this time. The values congruence crowd will continue to crow about how risk management draws us closer to the values we were founded upon (a weak argument, I’d say). Others will say fraternities and sororities lost their fun, their innocence, and their relevance. One thing for sure, lawyers and insurance agents made a lot of money. Yet, students are still dying from alcohol poisoning and hazing on a regular basis.”
  • A new Swiss Re Sigma study analyzes commercial liability insurance. “Emerging risks due to technological and social developments are a constant challenge: new insights into and changing standards around food safety, environmental pollution, employment practices and the compensation of financial loss are, for example, risks that insurers closely monitor. Roman Lechner, co-author of the sigma study, said: “Fortunately, none of these emerging risks has evolved into the next asbestos — yet.”

UPDATE:

  • MF Global was fined $10 million by the Commodity Futures Trading Commission for three risk management failures related to supervision. “The $10 million penalty imposed by the Commodity Futures Trading Commission is the latest fallout from rogue wheat-futures trades in 2008 that forced the company to take a $141.5 million charge, triggering a restructuring that led to the departure of its chief executive, Kevin Davis.”
  • In his latest View from the Press Box, Sam Friedman gives us some 20/20 hindsight on his previous predictions for 2009. “Way back on Jan. 5, I peered into my crystal ball for the likely Top-10 Property and Casualty Insurance Stories of 2009. Before I reveal what turned out to be my actual picks here on Dec. 21, let’s see how accurate my predictions were.”

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