FSA to consider brokerage rule changes
MF Global collapse highlights lax rules surrounding client funds
By CFOWorld.co.uk | CFO UK | Published 10:29, 26 January 12
The Financial Services Authority is considering changing the rules around how brokers handle client funds following administrators KPMG’s problems in recovering client assets from MF Global.
FSA spokesman Chris Hamilton said the regulator will consider changing the rules around holding cash in non-segregated accounts after KPMG threatened lawsuits against some firms holding MF Global client assets. The FSA stepped in to talk to these firms to break the impasse.
MF Global filed for administration following a £4 billion failed bet on European sovereign debt. The broker’s clients are struggling to get their money back on accounts where their investments have been pooled. KPMG has recovered $1 billion of the $1.2 billion worth of client assets, but has been unable to locate the remaining $200 million.
Brokerages like MF Global hold investments on behalf of pension funds or hedge funds. Problems arise when the broker goes bust because those assets are frozen and they are most likely invested elsewhere, which means they are sitting on someone else's books such as a bank or exchange.
KPMG has successfully reclaimed the assets and cash held by clients in segregated accounts, where there is demonstrable link between the asset and its owner.
But cash held in non-segregated accounts is proving harder to recall because the firms holding the funds are often also owed money and are wary of giving up what they have for fear they may not get what they are owed in the long run.
KPMG declined to comment on the possibility of rule changes but Chris Hamilton, a spokesman for the FSA, said they would be considered.
"Lessons from the MF Global UK administration process will be factored into the review of the effectiveness of the HM Treasury Special Administration Regime legislation (as required in the Banking Act 2009), scheduled for early 2013," he said.
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