Futures Industry Remains Divided on Insurance
By Jacob Bunge and Jamila Trindle
WASHINGTON--CME Group Inc. (CME) on Wednesday criticized the idea of an insurance fund for futures traders, reflecting
a rift in the industry over how best to protect its customers after a string of brokerage blowups.
Extending private insurance to cover the funds of futures traders or setting up a government-mandated protection plan
would cost too much while failing to adequately cover potential losses, CME Executive Chairman Terry Duffy said a
hearing held by a panel of the House Agriculture Committee.
A futures-market version of the Securities Investor Protection Corp., which covers U.S. stock investors, is "not
feasible," Mr. Duffy said, citing research commissioned by CME Group, trade groups and the industry's self-funded
regulatory organization, the National Futures Association.
Mr. Duffy's comments came at a hearing to discuss ways to shield users of the futures market from brokerage collapses
following the October 2011 implosion of MF Global Holdings Ltd. and last year's bankruptcy of Peregrine Financial Group
Inc., which came after revelations of a nearly 20-year fraud at that firm. Customers of Peregrine face an estimated $190
million shortfall in funds, and MF Global's clients have yet to see the full return of all their assets.
The episodes raised questions about oversight of the futures market, which relies on the CME and NFA to police the
day-to-day activities of brokerage firms that facilitate trading in grain and energy markets, as well as financial
While stricter rules have since been instituted for brokerages' management of customer money, some customers of those
failed firms have pushed for insurance plans that would cover customer balances in the event their brokerage fails. Last
year CME, the Futures Industry Association and NFA discussed with customers ways that an insurance plan could work, and
the groups commissioned a study on the issue last December.
A mandated insurance plan would only work with taxpayer backing and would add costs that could drive some investors
from the market altogether, Christopher Culp, a senior adviser with consulting firm Compass Lexecon, which has been
pursuing the study, said at the hearing. Some futures brokers could craft their own insurance policies, Mr. Culp said,
though this may require brokerages to contribute some of their own money to cover possible losses. That could add a
further burden to firms already struggling with near-zero interest rates that have crimped some revenues.
"We agree with our colleagues here that insurance for commodity accounts is a complicated matter which requires
deliberative study," said James Koutoulas, co-founder of the Commodity Customer Coalition, a group organized after the
failure of MF Global, and a vocal supporter of the futures-insurance idea.
"However, you do not need a study to determine that there is a type of customer who would benefit from an insurance
mechanism," Mr. Koutoulas told lawmakers, arguing that a $200 million fund would have covered 78% of MF Global
customers. Mr. Koutoulas said his group favors a "private insurance mechanism" that would let customers choose to pay
Bart Chilton, a Democratic member of the Commodity Futures Trading Commission who has also been an advocate of an
insurance fund for futures customers, said Wednesday he wasn't surprised that an industry-funded study didn't support
the insurance idea.
"Ask those that lost money with MF Global or Peregrine Financial if they think it's a good idea and you'll get a
different response," Mr. Chilton said in an email. He said it is "patently unfair that those investing in equity markets
are protected with insurance, yet farmers, ranchers and others in derivative markets are left to fend for themselves
when their money disappears."
Write to Jamila Trindle at email@example.com and Jacob Bunge at firstname.lastname@example.org
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