COO Connect Editorial: Interview with Jeff Jennings, global head of prime services listed derivatives at Credit Suisse, on futures clearing post MF Global
Futures clearing is one area of finance which has not been found wanting despite the market turmoil over the last few years. That was until the MF Global furore, when it was discovered that the futures broker, which filed for bankruptcy in October, was missing $1.2 billion in client assets. Questions are therefore being raised about how customer assets are being segregated from those of various companies in the futures clearing world. COO Connect Editorial spoke to Jeff Jennings, global head of prime services listed derivatives at Credit Suisse in New York, about his thoughts on the futures space.
COO: Futures clearing has been in the news a lot recently. Does there need to be further regulation to ensure client assets are segregated from firms’ assets?
Jennings: It’s difficult to thoughtfully answer that question without benefit of a better understanding of the facts and circumstances that led to the apparent deficiency in the MF Global client segregated account. The safeguarding of client assets is a well-established cornerstone of the futures markets and the existing regulatory structure and protections have been tested before and found to be strong—Refco and Lehman would be recent notable examples of that fact. Once we have a more complete understanding of what occurred with MF Global, we will be in a better position to effectively address the need for any enhancements to the existing framework of protections.
COO: How are firms like Credit Suisse reassuring its clients about the soundness of their operational infrastructure in regards to the futures clearing space?
Jennings: In light of recent events, we have actively reached out to our clients to review and discuss a range of relevant topics from segregation of client funds in general to the specifics of our operational infrastructure and related processes. Some clients want a refresher course on the details of how assets are segregated and the legal issues surrounding asset segregation. Others want to better understand the mechanics of segregation and any potential risks that could arise. And some want to understand how we, at Credit Suisse, control and monitor our internal processes to best ensure compliance with the relevant rules and regulations. It is all about having open and direct conversations with your clients and educating them appropriately regarding all aspects of your clearing platform.
COO: What else are clients asking about?
Jennings: We see many clients dedicating significant time and effort to undertake a comprehensive and thorough review of all aspects of their clearing relationships. We have very sophisticated clients who nevertheless find certain aspects of the clearing process and segregated environment challenging in their complexity and worthy of further analysis and understanding. Topics include FCM internal policies and procedures and access to related outside auditor reports; FCM investment policies and practices regarding client funds; third party custodial and agent relationships; credit and risk management practices; and FCM structure and capitalisation
COO: Are fund managers reassured with what you are telling them?
Jennings: In general, most market participants feel the client money protections afforded by the US regulatory framework and relevant industry practices are robust and adequate. There is a long history to support this conclusion. However, the unprecedented circumstances regarding the client funds held at MF Global have prompted a well-warranted intensive discussion regarding the adequacy of protections afforded under the current framework. As a result, clients have become much more knowledgeable regarding the concept of segregation and any risks that may exist. After the facts and circumstances of MF Global are better understood, then clients, clearers and the regulators can best determine if changes to the current framework are warranted.