A woman leaves the office complex where MF Global Holdings Ltd have an office on 52nd Street in midtown Manhattan
A woman leaves the office complex where MF Global Holdings Ltd have an office on 52nd Street in midtown Manhattan October 29, 2011. REUTERS

(Reuters) -- The head of the U.S. Commodity Futures Trading Commission has ordered an extensive review of how futures brokerages are regulated, following the collapse of MF Global three months ago, a CFTC official told Reuters on Wednesday.

CFTC Chairman Gary Gensler ordered the review after questions emerged about whether the CFTC or exchange-operator CME Group, whose self-regulatory arm served as MF Global's front-line regulator, could have done more to prevent the firm's collapse and safeguard customer money.

MF Global had nearly a half dozen regulators policing various parts of the firm, but no single regulator was responsible for the whole company.

Gensler has directed the agency's Division of Swap Dealer and Intermediary Oversight to find ways to bolster agency regulations for how it oversees and what it requires from self-regulatory organizations and futures commission merchants such as MF Global, the official told Reuters.

The review includes changes to the CFTC's own internal policies and procedures and possible calls for congressional action. It is not clear what the specific recommendations will say.

"There is a whole package of recommendations that staff has drafted at the direction of the chairman to bolster our current regulations," said the CFTC official, who was not authorized to speak on the record.

"I think, absolutely, I would say these are a direct response" to MF Global, the individual said.

A CFTC spokesman could not be reached for comment.

MF Global filed for bankruptcy on October 31 after investors and customers became rattled over the firm's $6.3 billion bet on European sovereign debt. Investigators are still trying to find more than $600 million in missing customer money.

A House Financial Services subcommittee is holding a hearing on Thursday with Michael Roseman, the former chief risk officer who is said to have raised red flags about aggressive trading bets at MF Global, and with representatives from the ratings agencies.

Under the current regulatory system, the CFTC does not examine any futures commission merchants such as MF Global itself and instead is reliant on self-regulatory organizations such as CME to oversee them. Gensler has said it is not an ideal system.

The CME has since defended the SRO model. Only a few days before MF Global's bankruptcy, CME examiners verified that MF Global's segregated customer fund account was overcollateralized. CME has since said that MF Global duped its examiners.

Some CFTC officials have heavily criticized the SRO model.

"I think we've gone too far in allowing the exchanges to be so self-regulatory that it's obfuscated the need for the cop to be on the beat all the time," Bart Chilton, a Democratic commissioner at the CFTC, said in December.


As trading volumes have soared during the last decade, federal regulators eased direct oversight of the industry and handed more regulatory powers to the major exchanges.

A look at the recent history of self-regulation shows the government repeatedly raised concerns about the resources the major exchanges dedicate to market oversight, while the CFTC also experienced staff cutbacks and retreated from hands-on policing.

The CFTC changes being proposed would be divided into three groups.

The first batch would include changes to internal policies and procedures, and would most likely not be made public. A second group would involve changes to CFTC rules, and would need to be put out for public comment. The third group would result in changes to the law and would require action from Congress.

It was not clear what the legislative proposal may include, but Gensler has said the CFTC simply does not have the budget or staff to directly examine futures brokerages. Congress controls the CFTC's budget.

Gensler has recused himself from the CFTC's probe into MF Global, but has been involved in reform efforts. Gensler and Jon Corzine, who resigned as chief executive of MF Global, worked together at Goldman Sachs Group Inc in the 1990s.

The agency's own commissioners and lawmakers such as Pat Roberts, the top Republican on the Senate Agriculture Committee, which oversees the CFTC, have called for reforms, including stronger protections for customer funds.

The CFTC also recently concluded an industry-wide spot check of major futures brokerages, and did not find any material breaches of customer fund protections.

Scott O'Malia, a Republican commissioner, said on Tuesday that more needs to be done to restore public confidence, such as routine spot checks by the CFTC to make sure firms similar to MF Global are properly segregating customer accounts.

"The MF Global collapse was a huge broken window in the Commission's neighborhood. To restore public confidence and to deter future violations of the segregation requirement, the Commission has taken action. It needs to continue taking action," he said.

(Reporting By Christopher Doering; Additional reporting by Philip Shishkin; Editing by Tim Dobbyn)