CME Group, Futures Industry Association (“FIA”), and The Institute for Financial Markets, and National Futures Association (“NFA”) announced the release of a study on the economic feasibility of adopting an insurance regime for the U.S. futures industry. The study was conducted by Compass Lexecon, a consulting firm, by examining four models for providing customer asset protection insurance (“CAPI”) for losses arising from the failures of futures commission merchants (“FCMs”). The study involved developing quantitative estimates for the potential costs of two models in particular, based on customer data provided by six FCMs ranging in size from large to small as well as risk exposure data provided by CME and NFA. The four CAPI models were as followed:
- CAPI provided to individual futures customers by primary insurance carriers;
- CAPI provided to customers of individual FCMs that purchase insurance on behalf of all of their customers;
- CAPI provided to customers of FCMs opting to participate in a captive insurance company backed partially by reinsurance; and
- CAPI provided to all customers of all FCMs under a government mandate.
The study found that the first two scenarios were too cost-intensive, so the analysis was then targeted to the last two models. The study found that for private, voluntary CAPI, there is an interest and willingness on the part of reinsurers to offer CAPI to U.S. futures customers through an FCM Captive that would absorb the first loss layer. As for the government-mandated CAPI, it was concluded that a Futures Investor and Customer Protection Corporation (“FICPC”) fund would be significantly underfunded to meet its target funding level. In order to be adequately funded, a “significant taxpayer-backed government backstop would be necessary” to supplement the envisioned paid-in capital of the FICPC.
See: Customer Asset Protection Insurance for U.S. Futures Market Customers; Joint Press Release.