Trading firms to face new rules on customer funds

By Marcy Gordon

AP Business Writer

WASHINGTON (AP) -- A federal rule adopted Monday places tighter restrictions on how U.S. trading firms can invest their customers' money. The action comes amid a federal investigation into whether MF Global illegally tapped its clients' accounts before filing for bankruptcy.

The Commodity Futures Trading Commission voted Monday to finalize the rule. It prohibits firms from using money from customer accounts for certain investments, including purchases of foreign debt. It also limits how much of their money can be invested in others, such as money-market mutual funds.

Firms will be allowed to petition the agency for an exemption to that restriction.

The agency had proposed the rule a year ago. But it held off adopting it after Jon Corzine, who led MF Global until last month, and others lobbied against it.

MF Global filed for bankruptcy protection on Oct. 31 after making a disastrous bet on European government debt. An estimated $1.2 billion or more may be missing from customer accounts.

Corzine, a former Democratic senator, New Jersey governor and CEO of Goldman Sachs, resigned as chairman and CEO of MF Global on Nov. 4.

The House Agriculture Committee has subpoenaed Corzine to testify this week about his role leading MF Global. Two other congressional panels are also expected to vote this week to subpoena Corzine.

The CFTC and other regulators are investigating whether MF Global used client funds for its own needs as its financial condition worsened.

Farmers, ranchers and small business owners have said they've lost money that they had deposited with MF Global. Many of them use the futures markets to hedge against risks, such as swings in corn or fuel prices.

The rule adopted Monday also ends the practice of firms borrowing from their customers for what are essentially loans to the firms. It also ends those kinds of financing transactions, known as repurchase agreements, between affiliates of the same firm.

Firms can continue to invest customer money in U.S. Treasury securities, municipal bonds and certificates of deposit.

The rule will take effect in about 60 days, and firms will have roughly six months to comply.

MF Global was believed to have raised much of the money for its investments in European debt with repurchase agreements with other financial firms. But regulators say MF Global may have borrowed from customer accounts to fund more short-term operations, such as covering demands for collateral.

Published: Wed, Dec 7, 2011