While it may be a lot smaller than MF Global, the systemic disappearance of segregated customer funds is a significant concern for many observers. Noting that MF Global was a quick reversal of fortune over a bad move in the Euro derivatives market that wiped out cash (that shouldn't have been touched) it's starting to look like the Peregrine Financial Group situation may have been going on for some time.
Questions about customer accounts have been circling the company for as long as two years, but it wasn't until PFG agreed to allow the National Futures Association, a self-regulating body, to look at bank data electronically were discrepancies found. Now the National Grain and Feed Association is expressing grave concerns as well. In a statement issued Wednesday, the group says it is "extremely alarmed" by reports of missing customer funds of futures commission merchant PFG.
The group says this latest incident is further evidence for the need for further reform to help prevent misappropriation of funds. PFG, which worked with farmers and elevators across the Midwest, is a concern because it shows that the MF Global incident was not a one-time problem. "We now see the significant risk to supposedly segregated customer funds still exists," the association says.
Earlier this month, the group submitted a series of substantive recommendations to Congress and the Commodity Futures Trading Commission designed to provide greater oversight and enhance customer protections in the event of another MF Global-type liquidation. The recommendations focused on policy changes likely to require congressional action, and were targeted at protecting customer assets in the event of an FCM bankruptcy.
The recommendations included amending the U.S. Bankruptcy code to provide greater and more detailed guidance in liquidation proceedings involving commodity brokers or FCMs; and placing customers frst in line for distribution of funds, ahead of creditors. The group also recommended establishing a new type of voluntary fully segregated customer accounts to shield customer assets from pooled losses if an FCM bankruptcy occurs, and extending insurance coverage to protect against FCM bankruptcies involving commodity accounts.
The concept of some kind of insurance to protect brokerage customers has arisen in the wake of the MF Global debacle, the PFG scandal will just add to the discussion.
NGFA added in its statement that it would "await a full explanation from regulators as to how the alleged missing funds escaped notice, apparently over a long period of time." PFG may have been falsifying records since 2010, which is a significant indictment not only of the firm but of the regulators keeping watch over customer funds.
The National Futures Association has said that whereabouts of customer funds is currently unknown. PFG filed for Chapter 7 bankruptcy late Tuesday.