WASHINGTON The U.S. derivatives regulator on Wednesday approved a plan to better protect customers of futures brokers after the collapse of MF Global left clients struggling to get their cash back.
The new customer protection rule requires brokers - the biggest of whom are units of large Wall Street banks - to tighten up reporting and disclosure procedures, and set aside their own cash to cover client shortfalls.
The Commodity Futures Trading Commission built in a long phase-in period for the hotly debated client protection requirement, after the futures industry complained it would be overly costly and depress trading.
The CFTC, which oversees futures and swaps markets, voted 3-1 in favor of the plan, which was first proposed a year ago.
Futures brokerage MF Global collapsed in October 2011, leaving customers reeling after finding that about $1.6 billion was missing from their accounts, money the company had used to stop gaps in its business, which is unlawful.
The CFTC's new rule bans a broker from dipping into one client's funds to cover a shortfall of another, requiring them to put up enough of their own money - known as residual interest - to cover any gaps in the funds.
The Futures Industry Association, an industry lobby group, had said the requirement would force the industry to pour an additional $100 billion into the business.
And clients - for instance, farmers who use futures to hedge the value of their harvests - feared that they would ultimately have to foot the bill.
The final rule gives the industry a maximum of five years to adapt. In the first year, nothing will change. After that, the brokers must hold the required amount of residual interest at 6 p.m. the next trading day.
As of January 1, 2019, that time will shift to early in the morning when a client's trades settle.
In the first version of the rule, the CFTC had said brokers should meet their residual interest obligations "at all times," language that had led to fears the industry would need to monitor customer accounts in real time.