In testimony at two separate hearings over the last week, the National Grain and Feed Association told Congress that the cumulative effect of the MF Global Inc. and Peregrine Financial Group insolvencies and the misappropriation of customer funds has created a "huge loss of confidence" in the adequacy of current rules to protect customer funds, as well as the adequacy of regulatory oversight.
NGFA says Peregrine and MF Global disasters solidify investor uncertainty in regulatory oversight.
The NGFA said the PFG incident, in which more than $200 million in customer funds allegedly were fraudulently misappropriated for a variety of illegitimate purposes over an extended time period, demonstrated that the MF Global incident was not a one-time incident and that serious risk to customer funds remains. The "cumulative effect" of the MF Global and PFG failures within a relatively short time – and "especially the failure of PFG at a time when regulators presumably were on heightened alert for problems" – has reiterated the need for steps to be taken to "begin restoring confidence and to bolster protections for segregated customer funds," the association said.
At a hearing conducted Aug. 1 by the Senate Agriculture Committee, Diana Klemme, vice president and director of the Grain Division at Grain Service Corp., Atlanta, Ga., said the discovery of long-term fraud and misappropriation of customer funds at PFG "removed all doubt" that systemic change and more effective regulatory oversight are needed.
Klemme cited an example of a typical country elevator with 4.2 million bushels of open short futures positions in July that had sent $9.4 million in margin calls to its futures commission merchant – all based upon the assumption that these customer funds will remain segregated and safe. She also noted that commercial hedgers such as these also depend upon their lenders to have confidence in the system, since they provide much of the money needed to finance such margin calls.
"We consider the loss of customer confidence in the system to be (a situation that is) both urgent and unsustainable," said Klemme, whose firm is an introducing broker servicing primarily country elevator clients. "The financial industry, Congress and our regulators all must recognize that trust and confidence are not easily regained. It will take real change, protection of customer funds, real-time transparency and significantly improved (regulatory) oversight – and not after endless regulatory debate and finger pointing."
During a separate hearing conducted July 26 by the House Agriculture Committee, John Heck, senior vice president of The Scoular Company, Omaha, Neb., and a member of the NGFA's Executive Committee, highlighted a series of legislative, regulatory and other policy recommendations submitted by the NGFA in late June to the House and Senate Agriculture Committees, as well as to the Commodity Futures Trading Commission.