After MF Global Collapse, CFTC Approves Client-Funds Rule

(December 6, 2011) — Following the collapse of MF Global, derivatives regulators in the United States have approved restrictions on how brokers can invest customer funds.

The new MF Global rule, named after the collapsed brokerage firm that allegedly used millions of dollars of customer money, reflects a greater longing by regulators to curb risk-taking on Wall Street

The Commodity Futures Trading Commission (CFTC) voted 5-0 to curb how brokers invest clients’ margin in money market funds, banning investments in foreign sovereign debt and in-house transactions. In addition, the rule prevents a complex transaction that allowed MF Global to essentially borrow money from its own customers. Commission Chairman Gary Gensler called the new rule “critical for the safeguarding of customer money.” He said: “I believe there is an inherent conflict of interest between parts of a firm doing these transactions.”

“This rule is necessary to restore confidence,” added Mark Wetjen, the newest CFTC commissioner.

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Meanwhile, according to Reuters, Senator Richard Shelby, a top Republican on the Senate Banking Committee, has criticized the CFTC’s handling of MF Global’s meltdown, asserting that its chief is “evading” questions about his position in overseeing the company.

MF Global filed for bankruptcy protection in late October. It had made large bets on European sovereign debt under the leadership of former New Jersey Governor John Corzine, MF Global’s CEO and the former CEO of Goldman Sachs. Questions have been raised over the company’s use of customer money in its proprietary trading accounts. The firm has been under investigation over the issue of customer fund use by the Federal Bureau of Investigations, the CFTC, and the Securities and Exchange Commission (SEC).

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(December 6, 2011) — Standard & Poor’s has put 15 Eurozone states on warning for downgrade, possibly stripping Germany and France of their AAA ratings.

The firm said ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments.

The ratings agency revealed that the systemic stresses stem from five interrelated factors:

(1) Tightening credit conditions across the eurozone;

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(2) Markedly higher risk premiums on a growing number of eurozone sovereigns, including some that are currently rated ‘AAA’;

(3) Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members;

(4) High levels of government and household indebtedness across a large area of the eurozone; and

(5) The rising risk of economic recession in the eurozone as a whole in 2012.

One of the implications of Eurozone turbulence, according to a recent study by Bank of America Merrill Lynch, is money managers seeking US and emerging market equities.

According to the firm’s November survey of fund managers, a net 27% of investors are overweight in emerging markets for the month, up from a net 9% in October. Meanwhile, a net 20% of investors are overweight in US equities, up from a net 6% in October.

A total of 72% of European managers who responded to the survey believe that Europe will sink into a recession in the next 12 months, up from a net 37% in October. Yet, fears about a global recession have waned slightly, with a net 31% of global investors expecting the world economy to avoid a recession, up from a net 25% the previous month.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742