MF Global fiasco leads to tighter regulations
Federal regulators approved tougher constraints on Wall Street risk-taking on Monday, adopting the "MF Global rule," named after the collapsed brokerage firm that is believed to have improperly used hundreds of millions of dollars of customer money.
The new rule will limit how the brokerage industry can invest customer money, largely barring firms from using client funds to buy foreign sovereign debt. It also prevents a complex transaction that allowed MF Global, in essence, to borrow money from its own customers.
The Commodity Futures Trading Commission, which voted unanimously to approve the rule, originally planned to finalize it months ago.
But the agency delayed action as a result of strong opposition from Jon S. Corzine, who at the time was chief executive of MF Global. Corzine resigned on Nov. 4, four days after MF Global filed for bankruptcy protection.
''I believe that this rule is critical for the safeguarding of customer money," Gary Gensler, the agency chairman, said at a public meeting in Washington.
The revelation that client money was missing at MF Global has incited panic in the once-quiet futures industry. MF Global's customers, including farmers, hedge funds and other investors, are still owed millions of dollars.
Some customers say they are losing faith in a system that promised to protect their money. While brokerage firms can invest client money, such funds must never be co-mingled with company funds.
MF Global violated that principle in its final chaotic days, tapping its segregated client accounts to meet its own financial obligations, people briefed on the matter have said. About $200 million in customer money that disappeared from MF Global surfaced at one point at JPMorgan Chase in Britain, the people said.
The missing money, thought to be as much as $1.2 billion, has prompted several federal investigations in recent weeks. The futures commission is leading the hunt for the money, while the FBI is examining potential wrongdoing.
Some regulators are also examining a flood of new rules for brokerage firms, part of an effort to prevent a repeat of the MF Global debacle.
The Securities and Exchange Commission is weighing new accounting disclosures for the industry.
MF Global's collapse has also led to renewed calls for federal regulators to keep a closer watch of brokerage firms, reclaiming oversight authority now delegated to for-profit exchanges like the CME Group.
The rule adopted by the futures commission on Monday is aimed at the industry's use of customer money. While firms can invest customer funds in U.S. Treasury securities, money markets and other plain-vanilla funds, the agency reined in some riskier bets.
Until now, brokerage firms could invest client money in a number of securities, including sovereign debt. Under the administration of President George W. Bush, regulators gradually lengthened the list of permitted investments.
Under the new rule, if firms want to invest customer funds in foreign government bonds, they must petition the agency for a special exemption. The new rule also bars firms from using client money so that one arm of the company can lend to another, a complex transaction known as an in-house repurchase agreement.
''I believe there is an inherent conflict of interest between parts of a firm doing these transactions," Gensler said.