The U.S. Commodity Futures Trading Commission (CFTC) is analyzing its proposed customer protections, i.e. segregated funds, after receiving a lot of criticism for its recent rulings. Customers and trade organizations have voiced concern over proposed protections they deem harmful to small to mid-sized futures commission merchants (FCM), which account for the bulk of agribusiness hedging activity.
Insurance, one form of protection for segregated funds, was excluded from the CFTC’s proposal. The Commodity Customer Coalition (CCC), a non-profit organization formed in response to the bankruptcy of MF Global, headed by co-founders John Roe, president of Roe Capital Management Inc., and James Koutoulas, CEO Typhon Capital Management LLC, is advocating creation of insurance policies for futures customers and has been working on reform initiatives such as an account insurance mechanism and testing alternative forms of collateral segregation, i.e. margining positions though bank account rather than futures broker.
The CCC’s currently pushing a captive insurance company model. To test the validity of that model, the CCC needs to determine if there is a sufficient market interest for an insurance product; what customers seeking that insurance would be willing to pay; what kind of coverage they would be looking for; and collect account-level data in order to formulate the actuarial model to make sure it’s feasible to create an insurance product.
Roe explains: “We’re talking about a small market here — very few people have a commodity trading account so we’re talking about limited exposure here. It’s not possible for an insurance company to produce such policies so we’d have to create a new company. The survey will measure demand, the actuarial ability to produce the product — and then hopefully we’ll have the data we need to roll up our sleeves and let the actuaries go to work.”
The CCC is conducting two surveys to determine the feasibility of customer account insurance. One survey is tailored to the needs of public customers of commodity firms; the other, to National Futures Association’s (NFA) member or member firms.
If the market demand is there, the CCC will develop its own captive insurance company and begin offering insurance policies to commodity customers.
The deadline is March 31.
Click on the link fror more information about CCC’s Insurance/Liquidity Concept.