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Commissioner Chilton Calls for Derivatives Insurance Fund

Futures markets are still reeling from the collapse of MF Global and Thursday, U.S. Commodity Futures Trading Commission (CFTC) Commissioner Bart Chilton is suggesting that an insurance fund for derivatives might be just what the markets need to restore confidence.

Bart Chilton | Commissioner U.S. Commodity Futures
Bloomberg via Getty Images
Bart Chilton | Commissioner U.S. Commodity Futures

In an email today, the outspoken Commissioner Chilton writes, I intend “...to actively pursue any and all other alternatives to protect customer funds, such as an insurance fund for derivative investors. This is an idea whose time has come.”

As the search for clients’ money continues and Washington starts to turn up the heat, Commissioner Chilton is trying to attack what could be the most meaningful victim of the MF Global bankruptcy—investor confidence.

As many have pointed out, securities in investor’s accounts are protected by the Securities Investor Protection Corp. (SIPC), a non-profit corporation which insures cash and securities up to $500,000 in customer accounts. Bank deposits are insured up to a limit by the Federal Deposit Insurance Corporation (FDIC).

What protected investors at Futures Commission Merchants (FCMs) including an MF Global, was the notion that segregated accounts were just that—cash and assets that would be separate from the firm’s assets where it was held and therefore, safe. That notion proved false.

“This is about shoring up customer and consumer confidence in markets and the firms themelves," said Commissioner Chilton in a phone interview. Chilton thinks a non-profit corporation funded by the broker-dealer community—similar to SIPC—might go a long way towards that goal.

Chilton is floating the idea in response to what he says have been hundreds of emails in the last few weeks from MF Global customers with 40 to 50 more hitting his inbox this week. MF Global investors are “…concerned that we are not looking out for them,” he said adding that it “doesn’t look good for people to get 100% of their money back”.

An insurance fund for derivatives similar to what SIPC does for securites investments would take an act of Congress says Chilton. “The momentum,” he says “is shifting to Capitol Hill”.

Traders want confidence restored because they claim liquidity has been quietly drained from the market over the past few weeks. While relevant to all futures markets, it is perhaps most concerning to the fixed income and euro-dollar futures markets.

The “MF Global bankruptcy was clearly the trigger”, says CNBC Contributor Keith McCullough, CEO of Hedgeye Risk Management. Traders are getting pushed into the front months future contracts because liquidity on the longer duration futures products “just isn’t there.”

CNBC Markets Analyst Kevin Ferry, of Cronus Futures Management, points to how a lack of liquidity could impact refunding by the U.S. Treasury of its debt. “The shear magnitude of one month’s issuance [by the U.S. Government] eclipses even the most robust combination of grains or metals markets. The Treasury is pumping out $165 to $171 billion in coupons monthly … the importance of these [futures] products is confirmed by the ease with which the flood rolls over.”

“The system is faith based,” says Ferry. “The MF Global collapse is not an example of markets working as the Fed’s Bullard so smugly suggests. This one is gonna leave a mark.”

Follow Lori Spechler on Twitter: @lorispechler

Disclaimer

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.