Client Asset Protection – are we there yet?

Client asset protection has been subject to a lot of focus in regulatory reforms after the episodes at MF Global and Peregrine Financial Group. In fact, many would argue that the conversation and focus about client asset protection is long overdue.

The regulatory reforms being brought about by the Dodd-Frank Act in America and EMIR (the European Market & Infrastructure Regulation) in Europe both have slightly different takes on how best to satisfy the need for improvements in this area. Clients now have a number of issues to consider when deciding upon the safety of their assets – under EMIR clearing houses must offer both individually segregated and omnibus accounts whereas the American model is more ‘one size fits all’ with LSOC; legally segregated operationally commingled.

“There is sheer confusion in the market,” said Jonathan Herbst, partner, Norton Rose at the International Derivatives Conference this week. “EMIR and Dodd-Frank offer different solutions and there are even different versions within Europe. There is now a concentration of risk within clearing houses that has brought with it its own package of issues - there is a need for conformity versus the competitive landscape and this is a huge issue.”

Indeed there is a lot going on in this area and cross-border rules on this issue only add to the confusion. “You can’t look at EMIR, CRD and the various national reforms in isolation,” continued Jonathan. “I’m not convinced that we’ve gone far enough with it. The real question is around what would happen to a client’s assets when there is a default by a fellow clearing member? Are clients properly protected? I’m not sure.”

Barbara Wierzynski, executive vice president & general counsel, Futures Industry Association, added that they have been doing a lot of work in helping customers to understand how their money is being kept. It all comes back to the point about confusion. “I think that what will happen is that private firms will take the info and digest it for people,” she said.

“I think there is a substantial risk in clients being drowned in all of the information about CCPs,” said Kevin Foley, partner, Partner, Katten Muchin Rosenman. “No one understood MF Global and the risks of trading with MF Global – not even the regulators! It took a lot analysis to conclude that this was a bad firm to trade with.

“Clients are looking at cost, reputation and who will accept them. There are controls as to who you should accept as a client and MF Global took risks there.”

There is no obvious solution to the topic of client asset protection. We’re certainly not there just yet, but we’re moving in the right direction. “We need to digest the reforms that we have,” said Kevin. “There will then be changes to the regulatory structure – for sure, we didn’t get this right.

“It’s always more difficult to change rules than to initially implement them. This isn’t going to be a quick process.”

“There is certainty in simplicity,” concluded Jonathan. “We need a period of settling down so that people can adjust to the current changes.” Perhaps then, we can find the right solution for this hot topic.

Tags: CCPEMIRDodd FrankAsset Management