Corcoran Commends Swift Action, Urges Commission and Industry to Begin Verification Efforts Immediately and Not Wait Until "Everything’s Perfect"
The U.S. Commodity Futures Trading Commission (CFTC) Technology Advisory Committee (TAC) invited R.J. O'Brien & Associates Chairman and Chief Executive Officer Gerald F. Corcoran, alongside other industry leaders, to serve as a panelist yesterday at its meeting. The purpose of the meeting was to focus on identifying and exploring technological issues and possible solutions relating to the ability of regulators to verify the location and status of funds held in customer segregated accounts at futures commission merchants (FCMs). The meeting followed the recent news that Peregrine Financial Group, a non-clearing FCM, apparently committed extensive fraud that resulted in a significant loss of customer funds.
Corcoran, a Certified Public Accountant and former Chief Financial Officer of RJO before he took on the role of CEO, applauded the CFTC, National Futures Association (NFA) and CME Group in their efforts to begin the read-only verification process. He emphasized the importance of transparency not only into customer segregated assets but also into the secured funds of customers trading on foreign boards of trade. He provided meeting participants with a detailed look at an RJO customer segregated funds statement to illustrate those areas that will be easier to provide verification of funds across the industry, as well as those items that have more complexities associated with verification and may take more time for regulators to implement.
Corcoran said that at RJO, for example, the firm has up to 70 different accounts with banks, carrying brokers and exchanges in the United States and abroad. Extrapolating this figure across the industry of 116 registered FCMs, Corcoran said regulators would probably be looking at well over 1,000 accounts in their verification efforts.
"Let's not wait until everything's perfect," Corcoran said, suggesting that the current proposals to offer "read-only" access to cash accounts be implemented immediately. He expressed confidence that the technology exists to provide regulators with all of the information they need to move toward more real-time access into all accounts, and that cash accounts will be a significant start as, across industries, most fraud has taken place in the cash domain.
Pointing out that firms undergo reconciliation procedures on a daily basis to match what is in the account balances with the firms’ books, he suggested that regulators automatically scrutinize further any time they find that there is a material discrepancy between the daily segregated funds report and account balances.
Corcoran also stressed the importance of transparency, separation of duties and checks and balances at FCMs. He suggested that in addition to looking at the asset side of the balance sheet with customer segregated assets, regulators and auditors must also scrutinize the liability side of the equation to make sure there isn’t a fraudulent firm understating its liabilities. He said he goes by the credo coined by former President Ronald Reagan, "Trust, but verify."
Headquartered in Chicago, RJO is the nation's oldest and largest independent futures brokerage and clearing firm. The CFTC will be posting a video replay of the meeting through a link on its website
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