- For the past 15 months three groups have been engaged in a MF Global tug-of-war over who is entitled to what, including a number of lawsuits and counter-suits.
Shortfall by SIPC
In contrast, stock/bond customers will recover everything they lost, with the losses covered by SIPC. This has prompted interest in creating a SIPC-like fund for futures/options customers.
SIPC was created by Congress in 1970 in response to a rash of financial problems in the securities industry. It currently has a $1 billion reserve fund, which has accumulated over the years from assessments on brokerage firms.
The standard assessment is 1/4 of 1% per year of each brokerage firm's net operating revenues from the securities business, but the actual rate may vary depending on the level of reserves held by SIPC at the time.
Since it was founded, SIPC has paid out more than $1.8 billion to over 767,000 investors. In the event of a brokerage firm failure, the firm's assets are distributed to customers on a pro-rata basis.
Then any shortfall is made up by SIPC, up to a maximum of $500,000 per customer, including up to $250,000 of cash. However, it is important to note that SIPC does not pay anything in cases of fraud.
Therefore, while such a SIPC-like fund for futures/options customers would have been useful in the MF Global situation, customers of Peregrine Financial/PFG Best would have been left empty-handed.
Futures and options volume at US exchanges fell by 13.2% in 2012, and many observers believe that in part this decline is due to a loss of customer confidence in the integrity of these markets.
While an industry-wide reserve fund is just one of several ideas under consideration, futures and options customers may remain cautious until some type of program is in place that fully protects their funds against these and other types of non-market losses.