MF Global trustee urges new customer safeguards

By Alexandra Alper

WASHINGTON (Reuters) - Futures customers should have access to a fund that guarantees their accounts up to a certain threshold, the trustee liquidating MF Global Holdings Ltd said in a report on Monday.

The report by James Giddens to the U.S. Bankruptcy Court in Manhattan gives an update on his efforts to recover up to $1.6 billion in missing customer funds, lost in MF Global's final days in October.

The report also makes recommendations to avoid a repeat of the chaos following the major brokerage firm's collapse, including a "modest protection fund" that would help futures customers in the event of a similar bankruptcy.

"A fund capped at a relatively low dollar amount per customer would suffice to make these customers whole very quickly even in a case with a shortfall the size of" MF Global's, Giddens said in the report. More than three quarters of the firm's customers had claims below $100,000, he said.

MF Global filed for bankruptcy on October 31, after investors and customers became rattled over the firm's $6.3 billion bet on European sovereign debt and downgrades by credit rating agencies, resulting in a liquidity crunch.

The bankruptcy and the missing funds have been the focus of several congressional hearings and are under investigation by federal agencies, including the Federal Bureau of Investigation and the Commodity Futures Trading Commission.

None of the firm's employees have been formally accused of wrongdoing.

A futures fund might be modeled on the Securities Investor Protection Corp, which guarantees customer securities investments up to $500,000.

"We have insurance funds for customers who put money in banks; we have it for folks investing in stocks," Bart Chilton, a Democratic CFTC commissioner, said in an email. "It makes sense to have insurance for futures customers, too."

Chilton has advocated for the creation of such a fund for futures customers in the past.

Giddens also recommended that the CFTC beef up requirements for segregation of customer funds traded on foreign exchanges to match those that apply to U.S exchange-traded funds.

He asked the CFTC to clarify that all customer assets be segregated from the broker's funds, regardless of whether they are invested at home or overseas.

Further, Giddens recommended that a firm's officers and directors be held "civilly liable" for events such as a shortfall in commodities funds segregation.

Giddens made similar recommendations when he testified before the Senate Banking Committee in April.

MORE REFORMS

The CFTC has sped up efforts to finalize rules mandated by the 2010 Dodd-Frank financial oversight law and approved others aimed at easing fears of futures customers still jittery after MF Global's collapse.

Earlier this year, the CFTC approved rules that would require companies such as mutual funds that invest in commodities to register with the CFTC.

Another would restrict the investment of futures customer funds, and a third protects cleared swaps customer contracts and collateral.

CFTC Chairman Gary Gensler has also ordered an extensive review of how futures brokerages are regulated by the agency.

Republicans lawmakers have pledged their support for boosting consumer protections but have declined to give specific examples.

"I will work with regulators and customers to strengthen the safeguards around customer accounts and to make sure those responsible are held accountable," Republican Senator Pat Roberts, ranking member of the Senate Agriculture Committee which oversees the CFTC, said in an email.

In an interview, Representative Randy Neugebauer, who heads a House Financial Services subcommittee investigating the collapse of MF Global, said he would turn to potential reforms once his subcommittee completed its report, due in July.

"What we want to do, is make sure we understand completely what transpired, so that when we start moving forward to restore the confidence back into this process, we only fix what is broken," he said.

A CFTC spokesman declined to comment.

(Reporting by Alexandra Alper and Aruna Viswanatha; Editing by Lisa Von Ahn and Tim Dobbyn)