Reuters: Regulatory News: UPDATE 1-CME, burned by MF Global, 'monitoring' Knight Capital

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UPDATE 1-CME, burned by MF Global, 'monitoring' Knight Capital Aug 2nd 2012, 16:21 Thu Aug 2, 2012 12:21pm EDT * Futures industry burned by recent losses of customer money * Knight bought Penson's futures brokerage in May * Penson had $411 million in customer funds under management By Ann Saphir CHICAGO, Aug 2 (Reuters) - CME Group Inc, which regulates Knight Capital Group Inc's newly acquired futures brokerage, is "monitoring" the embattled trading firm after an error wiped out $440 million of Knight's capital. Confidence in the futures industry's ability to safeguard customer funds has been shaken after two financially pressed futures brokers in less than a year have been accused of improperly raiding customer accounts for as much as $1.8 billion, despite regulatory oversight. Misfiring technology at Knight, a large New York Stock Exchange market maker, caused a rush of orders on Wednesday for dozens of stocks, roiling prices and undermining already weak investor confidence in U.S. financial markets. While securities regulators are looking into what went wrong on the trading side, the focus from the futures industry is on the estimated $411 million in customer funds that were part of Knight's purchase last month of floundering futures brokerage Penson Financial Services. That amount is slightly more than Peregrine Financial Group reported having when its CEO last month confessed to stealing from customer accounts for years, in part to keep his company afloat. Regulators say Peregrine's CEO misappropriated more than $200 million of customer money. The October failure of much larger MF Global resulted in a customer asset shortfall of $1.6 billion, the bankruptcy trustee has said. CME, which was MF Global's main regulator, has blamed misdeeds by management at both firms for causing the customer losses. "We are monitoring the situation with Knight," a CME spokeswoman said, declining to provide details. Knight said on Thursday it is "actively pursuing its strategic and financing alternatives to strengthen its capital base." CME says it did everything possible to prevent customer funds from being misused at MF Global as that firm dealt with a liquidity crunch following revelations of a bet on European sovereign debt that investors worried would turn sour. Within a day or two, CME had auditors on site checking MF Global's books, which showed customer funds were intact. Days later, CME found those books were wrong and MF Global had siphoned customer money from protected accounts to fund corporate needs, according to a CME account of the events leading to MF Global's collapse. Knight bought Penson's accounts on May 31 for $5 million, plus a cut of future revenue, a Securities and Exchange Commission filing shows. Penson had $411 million in customer funds as of that day, the most recent report from the Commodity Futures Trading Commission shows. It was one of a dozen or so independent future brokers that are only a fraction the size of the Wall street broker-dealers that dominate the industry. Separately, securities regulators are looking into Knight's trading error, the chief of the biggest U.S. options market said. "Our understanding is that the SEC and Finra are reviewing what happened yesterday," CBOE Holdings Inc CEO and Chairman William Brodsky told analysts. "We're obviously reluctant to get ahead of the regulators on this ... I really think we ought to let the facts come out and then see what happens." Knight Capital, one of the largest firms that buy and sell stocks to provide liquidity to the markets, blamed a "technology issue" for the problem. Link this Share this Digg this Email Reprints

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