CME Group Inc. announced it will tighten scrutiny of futures firms in the wake of the MF Global collapse, focusing on the way in which they safeguard customer funds.  The breakdown in segregating customer and broker funds at MF Global dealt a severe blow to the futures industry's credibility and to the credibility of the oversight that futures exchanges purportedly had been conducting.  In short, it revealed failures in a system that had been the bedrock of industry oversight for decades. CME, one of MF Global's main regulators, said that starting in May 2012, all members of its clearinghouse will be required to submit daily reports detailing client funds.  These must be approved by senior executives of the firms, and CME said it also would carry out more "surprise" audits of brokers' books.

"Customer segregation is the cornerstone of the futures industry, and it is critical to ensure the protections afforded under segregation are as strong as they can be for our market participants." -- CME officials, in a client notice sent out this week.

The stepped-up oversight is the latest move by Chicago-based CME, the largest futures-exchange operator in the world by trading activity, to address continued frustration from customers of MF Global that have yet to be returned an estimated $1.6 billion that had been held on deposit with the failed broker-dealer, five months after its collapse. MF Global, among the biggest players in global derivatives markets, was directly supervised by CME.  Calls by some lawmakers for the exchange operator to give up its oversight functions have pushed CME to explore further steps to defend customers that do business through futures brokers and devise new protections. CME last week opened for registration a new, $100 million insurance fund set up for farmers and ranchers that use CME's futures markets to hedge price risk.  The fund, announced in early February, originally had been slated to become available 3/1/12. Procedures For Daily Statements. In May, futures firms that clear transactions for customers on CME's derivatives markets will be required to file daily statements tallying client assets held on deposit against outstanding trades.  The statements will be due by noon on the following day, according to the notice sent to members this week.  Statements must be signed by members' CEOs, CFOs or a "designated representative." The CFTC already requires such firms to calculate how much customer money they hold against trades on a daily basis and to keep client assets separate from firms' own funds. Thomas Kadlec, president of ADM Investor Services, a commodity futures brokerage, supported the new measures, stating: "Confidence is important in this industry.  We're supportive of additional steps that would protect customer segregated funds." New Rules on Account Transfers. CME also outlined stricter rules for some transfers of customer money across accounts controlled by its member firms.  If a futures clearing firm wants to move 25% or more of its customers' excess funds held on deposit, its CEO, CFO or designated person would need to approve the shift in writing. In MF Global's final days, large-scale transfers of customer money were made quickly as the firm sought to stay afloat, and some of those funds wound up in the firm's own accounts, The WSJournal reported last month.  MF Global executives have testified that they didn't know their customers' money had gone missing until after the fact and that they never instructed staff to illegally dip into client funds. CME further plans to review members' stewardship of customer money under a new "surprise" review program to be submitted to federal regulators.  Firms also will be required to file bimonthly reports on how customers' money is invested and where funds are held, according to the notice. Click for the referenced story: [WSJournal, 4/5/12].