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NFA Studies Insuring Customer Segregated Accounts

Posted in CFTC Compliance

In the wake of several high profile failures of futures market participants, the NFA and others recently completed a study of how customer asset protection insurance (“CAPI”) would work in the futures industry.  The CAPI program would provide additional customer asset protection and limit the risk of loss to customers.  The study found that insurers were not in favor of individual futures customers or FCMs on behalf of their customers purchasing CAPI directly from primary insurance carriers because neither the individual customers nor the FCMs would retain any “first-loss retention”.  Insurers require their beneficiaries to have some “first-loss retention” so they retain some material exposure to first losses to mitigate “moral hazard” – the risk that insurance coverage reduces the incentives of the insured party to manage risk.

As a result, the study focused on an alternative scenario where several FCMs jointly form an FCM Captive insurance company that would provide CAPI to customers of its FCM participants.  The FCM Captive would retain first-loss retention, meaning the claims would be paid by the non-failing FCMs, and reinsurance would cover claims in excess of the first-loss retention.  The insurance industry supported the FCM Captive with reinsurance scenario.  The study also analyzed government-mandated universal insurance, similar to SIPC.  The study concluded that customers of small and medium sized FCMs would disproportionally benefit from government-mandated coverage.

Although insurance protection for FCM customers is probably a long way off, it is certainly possible that some form of additional protection for customers is on the horizon.