Gensler on LIBOR & PFG: Market Regulators Cannot Prevent All Financial Fraud


The CFTC’s Gary Gensler (who should have been immediately fired for signing off on PFG’s finances/audit in January) testified before the US Senate Committee on Agriculture today regarding Barclay’s LIBOR manipulation rate scandal and the segregated client funds theft at PFG.
Highlights of Gensler’s testimony:

  • CFTC initiated a review of LIBOR submissions in April of 2008 (and it took you 4.5 years to find a single culprit!?!)

  • Barclays regularly and pervasively submitted false benchmark rates to benefit the banks derivatives as well as LIBOR submissions (and JP Morgan, BOA, and Goldman didn’t Mr. Gensler!?!?!)

  • CFTC moved quickly to file a complaint against PFG’s Wasendorf (oh really…$200 million in segregated client funds were missing for 20 years! Do we have another 16 years to go before the CFTC rules on silver manipulation…the day after JP Morgan openly admits to the fact??)

  • The system failed to protect the customers of Peregrine. Market regulators cannot prevent all financial fraud‘ (What pray tell, financial fraud has the CFTC or the SEC EVER PREVENTED Mr. Gensler!?!)

Gensler’s testimony on LIBOR and PFG below:

CFTC’s Gary Gensler:


I’d like now to review the CFTC’s recent order against Barclays concerning the benchmarks LIBOR and Euribor.

People taking out small business loans, credit cards and mortgages, as well as big companies involved in complex transactions, all depend upon the honesty of benchmark rates like LIBOR for the cost of their borrowings.  Banks must not attempt to influence LIBOR, Euribor or other indices based upon concerns about their reputation or the profitability of their trading positions.

LIBOR and Euribor are indices at the center of the capital markets for both borrowings and derivatives contracts.  LIBOR is the reference index for the largest open interest of contracts in both the U.S. futures markets and swaps markets.  U.S. Dollar LIBOR is the basis for the settlement of the three-month Eurodollar futures contracts traded on the Chicago Mercantile Exchange (CME), with a notional value of about $12 trillion as of the end of June.  U.S. Dollar LIBOR’s traded volume in 2011 on the CME was a notional value exceeding $564 trillion.  According to the British Bankers Association, swaps with a total notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to LIBOR.

The CFTC initiated in April of 2008 a review of LIBOR after media reports raised questions about the integrity of the index.  Thereafter, we began coordinating with the United Kingdom’s Financial Services Authority (FSA), which helped us facilitate information requests.  The FSA and the U.S. Department of Justice subsequently joined the CFTC with regard to the Barclays matter, and it has been a collaborative effort throughout.

To conduct such a complicated case, the CFTC enforcement staff had to sift through a voluminous number of documents and audio recordings that spanned many years.

The CFTC’s Order found that Barclays traders and employees responsible for determining the bank’s LIBOR and Euribor submissions attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the bank’s derivatives trading positions.  The conduct occurred regularly and was pervasive.  Barclays’ traders located at least in New York, London and Tokyo asked Barclays’ submitters to submit particular rates to benefit their derivatives trading positions.  In addition, certain Barclays Euro swap traders coordinated with and aided and abetted traders at other banks in each other’s attempts to manipulate Euribor.

The Order also found that throughout the financial crisis, as a result of instructions from Barclays’ senior management, the bank routinely made artificially low LIBOR submissions.  Submitters were told not to submit at levels where Barclays was “sticking its head above the parapet.”  The senior management directive was intended to fend off negative public perception about Barclays’ financial condition.

The CFTC’s Order required Barclays to pay a $200 million civil monetary penalty for attempted manipulation of and false reporting concerning LIBOR and Euribor.  In addition, Barclays is required to implement measures to ensure its future submissions are honest.

Among other things, these requirements included:

• Making submissions based on a transaction-focused methodology;

• Implementing firewalls to prevent improper communications, including between traders and submitters;

• Preparing and retaining documents concerning submissions and certain relevant communications; and

• Implementing auditing, monitoring and training measures concerning submissions and related processes, including making regular reports to the CFTC.

The CFTC has and will continue vigorously to use our enforcement and regulatory authorities to protect the public, promote market integrity, and ensure that these benchmarks and other indices are free of manipulative conduct and false information.  The Commodity Exchange Act (CEA) is clear in its prohibitions against attempted and actual manipulation of futures, swaps and commodity prices.  Further, the CEA’s Section 9(a)(2) prohibits knowingly making false reports of market information that affects or tends to affect the price of a commodity.

The FSA is reviewing the LIBOR benchmark, and will be making suggestions as to how to improve it.  Moving forward, the CFTC stands ready to assist the FSA on its review of LIBOR and how to best assure that LIBOR, or any alternative benchmark that might emerge, is not susceptible to attempted manipulation or false reporting.  We look forward to working with regulators and market participants here and abroad to ensure that benchmarks for interest rates that touch borrowers and lenders around the globe are reliable and honest.

If these key benchmarks are based on observable transactions, borrowers, lenders and derivatives users around the globe all benefit.  If these key benchmarks are not based on observable transactions, I believe their integrity will continue to be subject to question.  And if these key benchmarks are not based on honest submissions, we all lose.

Peregrine Financial Group, Inc. and Customer Protection


On July 10, the CFTC filed a complaint in federal court against Peregrine and its sole owner, Russell R. Wasendorf, Sr., alleging that they misappropriated over $200 million of customer funds from an account held at US Bank.

It was just a day earlier, on July 9, that the Commission’s staff learned that its chief executive officer Mr. Wasendorf had attempted suicide and that Peregrine had only approximately $5.1 million on deposit in a customer account, while it was reporting it had over $220 million in that account.

The CFTC moved quickly to file the complaint in federal court in Chicago.  In addition to the misappropriation, the CFTC’s complaint alleges that the defendants failed to segregate and account for customer funds, and made false statements to the CFTC.  The complaint seeks restitution for customers and civil monetary penalties.  We sought an immediate order to freeze the defendants’ assets and appoint a receiver.  On July 10, the Court signed our requested order.  Later that day, Peregrine filed for bankruptcy.

On July 13, Mr. Wasendorf appeared in court on federal criminal charges.   The criminal authorities had arrested him for lying to the CFTC, and advised the court that it intended to file more criminal charges in the future.

Peregrine is a CFTC-registered FCM.  The NFA, a futures industry SRO, is responsible for front-line oversight.  As part of its oversight responsibility, the NFA is required to conduct periodic audits of Peregrine’s customer funds in segregated and secured accounts.  The NFA last completed such an audit in May 2011, and was in the process of conducting another periodic audit over the last several weeks.  Furthermore, under CFTC rules, FCMs must have their annual financial statements audited by an independent CPA.  As part of this certified annual report, the independent accountant also must conduct appropriate reviews and tests to identify any material inadequacies in systems and controls that could violate the Commission’s segregation or secured amount requirements.  Any such inadequacies are also to be reported to the SRO and the Commission.  Peregrine’s financials for the year ending December 31, 2011, were reviewed and certified by their independent CPA.

Peregrine used Jefferies Bache LLC, also a CFTC registered FCM, to clear its customers’ futures and options trades.  We understand from Jefferies that subsequent to the news of July 9, Jefferies liquidated the vast majority of Peregrine customer positions in futures and options.

The CFTC’s complaint, along with the criminal charges, tells a story of deliberate dishonesty and deception.  In a written statement found when he attempted suicide, as quoted in the criminal charges, Mr. Wasendorf said he committed fraud, manufactured phony bank documents, and forged bank signatures.  In short, the charges against him are that he took customers’ funds right out of the bank, and lied about it for years.

CFTC’s Customer Protection Focus

Although we do not yet know the full facts of what happened in this matter, the system failed to protect the customers of Peregrine.  Just like the local police cannot prevent all bank robberies, however, market regulators cannot prevent all financial fraud.  But nonetheless, we all must do better.  We must do everything within our authorities and resources to strengthen  oversight programs and the protection of customer funds.

The Commission has been actively working to improve protections for customer funds.  This includes:

• The completed amendments to rule 1.25 regarding the investment of funds bring customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005.  Importantly, this prevents use of customer funds for in-house lending through repurchase agreements;

• Clearinghouses will have to collect margin on a gross basis and futures commission merchants (FCMs) will no longer be able to offset one customer’s collateral against another and then send only the net to the clearinghouse;

• The so-called “LSOC rule” (legal segregation with operational comingling) for swaps ensures customer money is protected individually all the way to the clearinghouse; and

• The Commission included customer protection enhancements in the final rule for DCMs.  These provisions codify into rules staff guidance on minimum requirements for self-regulatory organization (SROs) regarding their financial surveillance of FCMs.

In addition, last week, we approved an NFA proposal that stemmed from a coordinated effort by the CFTC, the SROs, and market participants, including from the CFTC’s two-day roundtable earlier this year on customer protection.

The three key areas of reform included in the NFA rules are:

• First, FCMs must hold sufficient funds in Part 30 secured accounts (funds held for foreign futures and options customers trading on foreign contract markets) to meet their total obligations to customers trading on foreign markets computed under the net liquidating equity method.  FCMs will no longer be allowed to use the alternative method, which had allowed them to hold a lower amount of funds representing the margin on their foreign futures;

• Second, FCMs must maintain written policies and procedures governing the maintenance of excess funds in customer segregated and Part 30 secured accounts.  Withdrawals of 25 percent or more of excess funds in these accounts (that are not for the benefit of customers) must be pre-approved in writing by senior management and reported to the NFA; and

• Third, FCMs must make additional reports available to the NFA, including daily computations of segregated and Part 30 secured amounts, as well as twice monthly detailed information regarding the cash deposits and investments of customer funds.

The CFTC also has implemented a significant restructuring, based on a new strategic plan, regarding our oversight of SROs and intermediaries.

SROs are the primary regulators of FCMs, commodity pool operators, and commodity trading advisors.  Based on completed Dodd-Frank reforms the NFA also will take on additional duties with regard to swap dealers.  The CFTC oversees the SROs, examining them for the performance of their duties.  We review the SROs’ work papers only on a limited number of FCMs each year.  Historically, the CFTC only conducts a direct review of an FCM in a “for cause” situation, meaning an issue had arisen.

The CFTC last year established a new division dedicated solely to the oversight of the SROs and intermediaries.  We created a branch within the division to specifically oversee examinations.  We were able to attract talented individuals from the private sector with many years of relevant experience to lead this new division and branch.  We have begun the process of strengthening our examination program, including adding risk and control elements.  Separately, we also recently created a Consumer Outreach Office to help consumers get information about avoiding fraud.

In addition, the CFTC’s enforcement arm aggressively pursues bad actors in the markets. In the last two years, the Division of Enforcement has been filing cases and opening investigations at the highest rate in the CFTC’s history.  Roughly half of the cases involve fraud against customers.

Since October 2009, the CFTC has brought 22 administrative cases against registered FCMs, 13 of which involved supervision failures and one of which involved a failure to maintain customer secured funds properly.  In the same period, the CFTC brought two cases in federal court against FCMs, one for violating segregation rules and the other for failing to be properly capitalized and to maintain books and records.

The Commission in April charged JPMorgan Chase Bank, N.A. for unlawful handling of Lehman Brothers, Inc.’s customer segregated funds and imposed a $20 million civil monetary penalty.  In another case against a public accounting firm and a CPA partner of the firm, the Commission imposed sanctions for failing to conduct proper audits of a registered FCM.  In one of our supervision failure cases, a registered FCM was sanctioned for failing to follow its own compliance procedures regarding “know your customer” requirements.

Customer Protection Reforms Ahead

While the Commission’s enhanced customer protection rules, staff reorganization and enforcement efforts to date have been significant, I believe we must do more.  I believe we need to further enhance the agency’s rules for customer protection.  Staff recommendations, as outlined below, based on substantial commissioner and market participant feedback are now drafted and in front of commissioners.

First, we must incorporate the NFA rules approved last week into the Commission’s regulations so that the CFTC can directly enforce these important reforms.

Second, I believe it is critical that we bring the regulators’ view of customer accounts into the 21st century.  We must give the SROs and the CFTC direct electronic access to FCMs’ bank and custodial accounts for customer funds, without asking the FCMs’ permission.  Further, acknowledgement letters (letters acknowledging that accounts contain segregated customer funds) and confirmation letters must come directly to regulators from banks and custodians.

Third, I believe we need more transparency to customers about their funds.  Futures customers, if they wish, should have access to information about how their assets are held and with whom, similar to that which is available to mutual fund and securities customers.

Fourth, I believe we need to consider enhanced controls at FCMs regarding how customer accounts are handled.

In addition, I believe we need to carefully consider additional  rules laying out the SROs’ requirements for conducting examinations and audits.

Building on the public roundtable earlier this year, I have asked CFTC staff to hold another public roundtable on these critical customer protection issues in the near future.

Regarding the Commission’s oversight of SROs and intermediaries, though we’re making progress through our reorganization and new rules, the recent events at Peregrine highlight the necessity of looking at the decades-old system of SROs as first-line regulators and the Commission’s role in overseeing SROs.

The Commission’s limited resources have historically not allowed for direct oversight of FCMs.  There are 46 staff members, including 35 audit staff, on the CFTC’s examinations team who oversees four SROs, which in turn have responsibilities for more than 1,000 entities.  On top of the current lack of staff for examinations, our responsibilities are expanding to include reviews of many new market participants.  For instance, there are currently 115 FCMs, and staff estimates a similar number of swap dealers will ultimately register.  More frequent and in-depth examinations are necessary to assure the public that firms have adequate capital, as well as systems and procedures in place to protect customer money.  Greater coverage by regulators – like having more cops on a beat – will improve integrity and heighten the deterrent effect of the review process.

The President’s FY2013 budget, following a similar request in 2012, asked for nearly double the CFTC’s current resources for the examination function to better protect the public.


Nearly four years after the financial crisis and two years since the passage of Dodd-Frank, the CFTC has made significant progress in implementing Congress’ common-sense reforms for the swaps market.

With the foundational rules in place, it is critical that we complete the remaining reforms that will bring transparency and competition to the swaps market, lower costs for companies and their customers, and protect the public.

It is also crucial that the CFTC, working with SROs and market participants, continues its efforts to enhance protections for the funds of both futures and swaps customers.
Click here for Gensler’s full testimony: