Apparently the 'loophole' that allowed MF Global to use customer assets for their own purposes and not set aside sufficient funds to cover them is still in place and still being used by some brokers.
The CFTC has sent a letter this month to all futures brokers telling them to stop using this loophole, and intends to close it through additional formal actions.
Change occurs, but slowly.
A Loophole Big Enough To Lose a Billion
By James B. Stewart
24 June 2012
If nothing else, the collapse of MF Global has made one thing clear: The notion that customer assets were safe was a sham.
MF Global’s customers, who discovered that the firm had plundered $1.6 billion of their property, learned that the hard way. But they aren’t the only potential victims. The loophole that allowed MF Global to convert more than $1 billion in customer property to its own reckless bet on European debt is still in effect — although the Commodity Futures Trading Commission, which regulates futures and commodities brokers, said it had since pressured other firms to stop using it.
The CME Group, which is both the largest commodities and futures exchange and also regulates many brokers, told me this week that when MF Global collapsed last year, four of the 40 firms it oversees were still using an “alternative” calculation of customer assets that vastly understates what firms actually owe. A spokeswoman declined to name them, saying such information was confidential. In my view, they should all be identified publicly so their customers can demand reassurances that the practice has stopped — and that their assets are safe.
Since the Depression, when thousands of customers were wiped out by failing brokerage firms, the idea that customer assets are protected has been sacrosanct, embodied in laws and regulations that require the assets to be safely segregated. Violating these requirements is a crime.
The rules require a firm to put aside the amount it would owe if its customers’ accounts were liquidated. This would seem simple common sense: if a brokerage firm closed or failed, customers should expect to get the full value of their assets.
But the rules apply only to accounts in the United States. In 1987, the commodity commission approved a series of rules governing foreign futures and options transactions, one of which provided an alternative calculation of how much firms needed to put aside for accounts that traded on foreign exchanges.
The alternative calculation almost always resulted in a lower amount — sometimes much lower — that needed to be segregated in foreign accounts, because it covered only options and futures. Cash and securities held in customer accounts didn’t count. So if a customer held only cash and securities, the firm had no segregation requirement at all...
To its credit, the commodity commission is taking action. This month the commission sent a letter to all regulated futures brokers telling them the agency expects them to use the net liquidating calculation — and not the alternative calculation — for all accounts, American and foreign, “pending adoption of the new rules.” It said those new rules would include “the elimination of the Alternative Method.” The letter also said that all firms still using the alternative method had agreed to discontinue using it...
Read the rest here.