Dear NIBA Membership:
The collapse of Peregrine Financial Group, Inc. (‘PFG’) represents the second time within nine months that a FCM failure accompanied by a shortfall in customer segregated funds has severely impacted the businesses of NIBA members. Many of you have asked why the PFG trustee has not distributed any funds, whereas the MF Global, Inc. (‘MFGI’) trustee made distributions early on in the bankruptcy and continues to make such distributions. You have also asked what role NIBA plays in both these situations.
Second question first. NIBA is organized as a membership trade association. NIBA is mandated by its Bylaws to provide education and a forum for learning and networking in order to support the business efforts of the membership. Conferences, newsletters and communications with the CFTC and other regulators are some of the ways NIBA distributes the information and provides educational support. NIBA has been committed to this role in the industry in behalf of its membership for over 20 years.
Now to answer the first question, which is a bit more technical. There were two legal reasons that allowed the MFGI trustee to make early distributions to customers that are not present in the case of PFG.
- CFTC regulations require the trustee of a bankrupt FCM to make initial transfers of positions and equity within a few days of the bankruptcy filing -- but only for accounts that have open futures positions. (CFTC Regs. 190.02(e)(1) and 190.06(e)(1)) With MFGI, many customers had open positions that were transferred to new FCMs within days of the bankruptcy filing in accordance with this rule. However, with PFG no futures customers had open positions to transfer because PFG’s clearing FCM, Jefferies Bache, LLC, liquidated all positions within a day or so of PFG’s collapse.
- CFTC regulations also require a guarantee or other assurance to be provided to the FCM’s bankruptcy trustee. This ensures that the bankruptcy estate would not be depleted if, through the distributions, the trustee made overpayments to any parties. (CFTC Reg. 190.08(d)(5)) The guarantee or other assurance must be in place, per the CFTC regulation, before any partial distributions can be made. With MFGI, the CME Group, MFGI’s SRO, made the guarantee. The NFA was PFG’s SRO. There are many complications as a result, including that the NFA is not a publicly held company like the CME Group is. Additionally, there is the complication of the criminal fraud which was reportedly a part of PFG’s CEO suicide confession. So, it remains unclear at this time, whether there is a party capable and willing to provide a guarantee sufficiently large to permit significant distributions by the PFG trustee.
On September 12, 2012, the NIBA membership meeting in Chicago will include a legal and regulatory panel which will provide an up-to-the-minute report of both the MFG and PFG situations. The NFA, along with NIBA’s legal advisors, will present the panel.
What is The NIBA Doing?
Members of the NIBA Board were in the Washington, DC offices of the CFTC on the day following the news of PFG’s collapse to inform the Commission what effect MF Global has had on our membership, and to hear from the Commission how they were addressing both FCM failures.
Additionally the NIBA continues to post information regarding the failure of PFG and the bankruptcies of both PFG and MF Global on the NIBA’s website as it becomes available. The NIBA is committed to providing a voice for our membership as we work with the regulators in Washington and Chicago to find better protections for our customers and our members.
Solutions, their implementation and enforcement involve many parties and, in some cases, will be complex. Some will take considerable time -- time that is precious to our industry. NIBA has many members who are suffering financially right now, and all of us have been dealt a blow to the survival and future growth of our businesses.
So, please continue to contact us with your suggestions. For more information, please contact:
Melinda Schramm, melinda@futuresrep.com, Chairman;
Neal Stevens, nstevens@SRCattorneys.com, Of Counsel, Schuyler, Roche & Crisham P.C.; or
John Jensen, jjensen@hwfi.com, President.
Thank you.
Best regards,
Melinda Schramm
Chairman, NIBA