Streetwise Professor Craig Pirrong: "With 'Fixes' Like These"

Economist Craig Pirrong ("With 'Fixes' Like These," Streetwise Professor) analyzes the CFTC's proposed rule on protection of customer funds. If adopted, such rule will require FCMs to maintain residual interest in segregated accounts in an amount which exceeds the sum of all margin deficits for futures customers. Noting that the proposal is intended to prevent another MF Global or Peregrine, Pirrong observes that having more excess margin in customer accounts will only increase the money that a Corzine or Wasendorf might tap to cover a company's losses. Pirrong argues that the near universality of the current omnibus model in futures markets that allows FCMs to temporarily cover a customers' margin deficits with margin of other customers, and its survival for decades, provides compelling evidence that the benefits of the current model far exceed the costs. Thus, he concludes that the CFTC proposal will impose substantial burdens on FCM operations, but will not fix the problem it is supposed to be addressing.

Related News Items:Managed Funds Association Submits Comment Letter to CFTC on Proposed Rules for Enhancing Customer Protections (with Lofchie Comment) (February 19, 2013) and National Futures Association Submits Comment Letter to CFTC on Proposed Rules for Enhancing Customer Protections (with Lofchie Comment) (February 19, 2013).