Published March 21, 2012
In an effort to prevent a repeat of futures brokerage MF Global's post-bankruptcy debacle, the so-called Corzine rule would require a principal like a CEO to sign off on large transfers of customer cash.
The proposed regulation aims to boost cratering confidence in the futures industry, which has been absolutely rocked by the revelation that, under Corzine, MF Global broke longstanding tenets by dipping into client cash that is still missing.
“This problem has really blown a hole in the futures industry,” said Michael Greenberger, former director of the Commodity Futures Trading Commission’s division of trading and markets. “Trading is down and people in the industry are very concerned about the industry’s future. Even hedging, which people think is a necessity, is being abandoned by commercial entities.”
Last fall MF Global collapsed under the weight of more than $6 billion in bullish eurozone bets that Corzine directed the New York-based company to make.
Investigators have said the firm used client cash, which is supposed to be ring-fenced, to help it meet margin calls and customer withdrawals as it faced a run on the bank. The MF Global bankruptcy trustee is still searching for some $1.6 billion in missing client money, leaving many futures traders and farmers in financial limbo.
“He lost his own money and that’s bad, but that can be ironed out in bankruptcy. But he lost his customers' money and that has really reaped a whirlwind in the industry,” said Greenberger, who is a law professor at the University of Maryland.
Holding Execs Responsible
At a recent industry conference, representatives from big investors like the California Public Employees' Retirement System, or CalPERS, and bond powerhouse Pimco made it “very clear if their money is not safe, they’re just going to stop doing these trades,” said Greenberger.
With that in mind, the futures industry is racing to safeguard client money and avoid a mass exodus. After all, what good is using futures contracts to hedge your bets if the money you use to hedge could vanish?
By forcing high-level executives to sign off on large transfers of client funds, CEOs wouldn’t be able to claim, like Corzine has, that they had no knowledge of what was going on. In theory, it would act as a deterrent to future firms facing a run.
“We just want to make that much less likely to ever happen," said Dan Roth, CEO of the NFA, which is an industry-funded watchdog that outlined the plan earlier this month.
Violators of the rule would be subject to sanctions, including potential expulsion from the NFA, which all futures commissions merchants are required to be a member of, Roth said.
Greenberger said the punishment should go further, putting executives in jeopardy of criminal charges and jail time, not just hefty fines.
“People want the CEO to spend some time in prison,” said Greenberger. “Often the fines are just the cost of doing business, but spending time in prison is very therapeutic in encouraging conduct that protects the investor.”
Roth said for this to be a criminal violation, Congress would have to approve changes to the Commodity Exchange Act. He said that while the NFA doesn't have a position on making it a criminal matter, "I don't know that we'd be opposed to that. We'd have to consider that."
Will Corzine Rule Take Effect?
However, some argue stringent requirements like Sarbanes-Oxley can backfire, creating a disincentive for companies to public or enter a certain industry. They say requirements like this can cause CEOs to have to micromanage the company.
“I’m not one for burdening CEOs with extraordinary and unreasonable auditing principles, but we can see the loss of this money has gone to the core of the viability of a multi-trillion dollar worldwide business,” said Greenberger.
Roth said the NFA has reviewed the proposed rule with its members and "so far no one has felt it was an unreasonable burden on NFA firms."
In a sign of the widespread fallout of the MF Global debacle, earlier this month the CME Group, which was MF Global’s front-line regulator, announced the resignation of CEO Craig Donohue.
Roth said the NFA may take up the Corzine rule in May. If approved, the rule would then have to be submitted to the CFTC for approval there.
It’s not clear if the proposed Corzine rule and other potential regulations will ultimately be enacted, but it is apparent there is the political will for some major changes.
Lawmakers on both sides of the aisle have been taking up the cause of individuals who have money missing in the MF Global aftermath.
“This is a bipartisan concern,” said Greenberger. “MF Global messed with the wrong people here. You not only have the powerful interests of the buy side of this market, but you’ve got farmers and ranchers up in arms.”