It was only a matter of time before discussions about a futures bailout fund turned serious in the wake of MF Global's collapse. MF customers could be on the hook for more than a billion dollars with no chance of recovery. So it stands to reason that investors in the futures market would start clamoring for some type of protection.
The NFA is now working with the CME and other futures markets participants to lay the groundwork for some type of insurance for futures accounts, be it a GSE model like the SIPC or a completely private bailout fund contributed to by market participants.
"Could there be a SIPC-type approach for futures? Yes," said Don Horwitz, of Oyster Consulting in Chicago. "It's not as if they could just overlay it, there are some costs, but this will be one of the things I'd think would be considered."
This is something that needs to happen and is, quite frankly, long overdue. It will obviously be paid for by customers, but I think you'd be hard pressed to find one who'd complain about it. The notion that futures markets are more liquid and transparent than equities, and therefore insurance isn't necessary, is a ship that has sailed (and was christened the S.S. Corzine).
Will it cost a little money to insure customer deposits against bankruptcy and fraud? Sure. But you can bet your bottom dollar that customers will willingly pay it. As infrequently as something like this happens, a bailout fund sufficient to cover almost any contingency could be built up in less than five years.
It's something that needs to happen, and it's good to see the NFA taking a proactive stance on the matter.
Or am I wrong?
I agree that people would absolutely pay for it, but won't the fact that futures are now insured cause more speculation and risky behavior? Think about it; are you more likely to speed with an off-road, 4-wheel drive vehicle, or a beat-up, rusty old Honda?
It wouldn't insure the investments, just like SIPC insurance doesn't insure your stock trading. It would only be insurance against the firm where you hold your account going bankrupt and taking your money with it.
Don't we have credit default swaps already for that?
Sure, if you're a hedge fund manager with a couple hundred million under management. But those aren't the guys who need protection.
This was a few months ago, but didn't the CBOE come up with a product that was basically a credit default swap for the individual investor? I think it was only for a few companies...
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