US Regulator Plans Further Regulation in Wake of PFGBest Scandal

ForexNewsNow | Published on August 9, 2012 at 8:13 am

ForexNewsNow – The CFTC’s Chairman Gary Gensler recently appeared before the U.S. Senate Committee on Agriculture explaining the new reforms the organization has proposed in order to ensure a better protection regime for retail traders and investors. The need for the reforms was sparked by the perceived abuses committed by the broker PFGBest, which recently went down in flames after the National Futures Association discovered that $220 million in traders’ funds was missing from PFGBest bank accounts.

CFTC’s Chairman Gary Gensler appears before the Senate Committee on Agriculture

The Chairman of the CFTC recently gave a testimony before the Senate Committee on Agriculture proposing some new guidelines that the organization along with the NFA should adopt in order to prevent cases such as the one about PFGBest from happening again.

About a month ago the small US broker PFGBest vent bust when the NFA determined that it had defrauded traders of more than $200 million, money that is at this money not available anymore.

CFTC admits that together with the NFA failed to protect traders

During the testimony, Chairman Gary Gensler admitted that his organization along with the NFA had failed to detect in time the practices conducted by PFGBest. As a result a large number of traders were defrauded with a total sum of more than $200 million.

As a solution the organization has proposed a new set of guidelines that will aim to protect traders as well as clear the image and reputation of the online trading market after the recent incident involving PFGBest.

New reforms proposed by the CFTC

One of the biggest changes requested by the CFTC is that from now on brokers should be obliged to keep enough funds separated in special accounts to be able to meet customer obligations at any moment.

Another rule is to always monitor trader’s funds in segregated accounts and keep written records of excess funds in these accounts. Withdrawals of more than 25% of excess funds will have to be approved in advance and will have to be reported to the NFA.

Regulated brokers will also be obliged to make additional reports to the NFA regarding the daily movements of segregated funds as well as two additional reports per month regarding cash deposits and investments made by customers.

The CFTC also would like to receive direct electronic access to the info related to customer’s funds. At this moment the only way to verify this data is through written statements submitted to the CFTC and to the NFA by brokers.

An additional transparency rule should also be implemented that will allow traders to check the information about how their funds are being used and held by brokers. The CFTC would also like to establish new guidelines regarding how brokers manage customer funds in order to avoid future abuses.

Conclusions

Basically the whole PFGBest scandal would have been avoided with the existence of such rules in the first place. The fact that the broker managed to fake its financial statistics and bank statements meant that the NFA was not able to early detect the wrongdoings of the company.

The lack of regulation and oversight in the matter of segregating trader funds from active funds also greatly lead to this situation. The new guideline that have been proposed by CFTC Chairman Gary Gensler are adequately addressing these issues and if adopted would considerably enhance player protection and avoid any future cases such as the PFGBest scandal.

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