The futures industry’s rules for segregated funds help protect customer capital in the event of a brokerage bankruptcy**.

In recent years, many investors found out the hard way they have very little recourse to recover funds in the event of a financial firm’s bankruptcy. Although the Bernie Madoff “hedge fund” was by far the highest profile case, there were numerous less publicized bankruptcies and defaults at other firms and investments (including legitimate ones), in which investors found recouping remaining funds difficult or impossible. Sometimes it’s a case of being the last in line of a long list of creditors, a problem that’s compounded when customer funds aren’t separated from a firm’s funds. Such “commingled” funds might have been used to fund the firm’s operating expenses or in its own trading. If a firm enters bankruptcy, it can be very difficult or impossible to recover customer funds that were commingled in such a fashion.

However, all futures trading accounts, including managed futures, have the advantage of specific industry rules that require the segregation of customer funds from the firm’s own funds. The practice of segregating customer funds protects investors in the event of default at the Futures Clearing Merchant (FCM, the industry term for futures brokerage firms licensed to trade on futures exchanges in the U.S.) holding their account. While FCM bankruptcies are rare, they do occur. In 2005, Refco Inc. and 23 of its unregulated subsidiaries filed for Chapter 11 bankruptcy protection. However, Refco’s regulated subsidiaries (where customers’ futures trading and managed futures accounts resided) were unaffected and customers were able to continue trading and managing their accounts.

Investment Risk and Firm Risk

Although first-time managed futures investors might assume they’re depositing money directly with the Commodity Trading Advisors (CTA) running the fund, in fact, customers open an account in their own name at an FCM. The CTA is then given the authority to trade per the fund’s investment strategy. Segregated funds possess a separate identity from FCM funds in the firm’s bank account. Once funds are deposited, the bank signs a written acknowledgement stating it will not use the funds for anyone other than the customer. Also, the FCM is required to use these funds only in certain pre-defined instruments. The end result is that, in the event of a crash or FCM bankruptcy, customer funds can be more easily recovered.

FCM Reporting Requirements

Segregated funds are subject to stringent daily, monthly, and annual monitoring by industry regulatory agencies. Every day, FCMs must submit a report to the National Futures Association (NFA) detailing the breakdown of their customer funds. This “Segregated Investment Detail Report” (SIDR) lists the actual and expected segregated funds in the FCM’s accounts. In addition, every FCM must file monthly financial reports with the Commodity Futures Trading Commission’s (CFTC) Division of Clearing and Intermediary Oversight (DCIO) within 17 business days after the end of the month. Finally, the FCM is subject to a yearly audit by the Joint Audit Committee, a consortium of U.S. futures exchanges and regulatory organizations.

CFTC oversight

The provision for segregated funds is stipulated in the Commodities Exchange Act. As a result, the CFTC, which is the futures industry equivalent of the Securities and Exchange Commission (SEC), regulates all practices for segregated funds. Any case of malpractice results in an administrative proceeding before a CFTC law judge. If an FCM is found guilty of the charges, the CFTC can suspend or revoke trading privileges, assess penalties, or issue cease and desist orders. There have actually been very few malpractice cases; most are the result of technical or processing difficulties within an FCM, or a delay in reporting. For example, the CFTC imposed a civil penalty of $300,000 in 2009 on a large FCM for violating rules related to segregation. Besides reporting process violations, the CFTC charged the company with not holding enough funds in its customer funds account. (The shortfall occurred because the FCM had purchased Treasury notes between 2007 and 2009 using a mix of its own and customer funds.) In response to the charge, the firm established a “segregation forecasting mechanism” to ensure that proper segregation was maintained between customer and company accounts. Before making any investment in futures or managed futures, investors should research the company where they plan to open an account. The NFA makes this research easy at the BASIC (Background Affiliation Status Information Center) section of its website.

Dean Hoffman

**MF Global

Source-CME Group

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It’s necessary for parents to be alert and make sure the home schooled child has enough chances to socialize, as sometimes this may be a challenge. Public schools usually contain a broad cross section of students from backgrounds of all kinds. The typical school in the U.S., for example, is extremely varied in the type of students who attend. When kids interact with others, it gives them valuable information that allows them to develop social skills.

Learning how to get along with people they just met can be important, as kids can’t only interact with their parents and siblings. At some point, everyone has to learn how to live in the outside world, so it’s good for kids to learn this at an early age.

While this may not be obvious at first glance, the socialization of a child who is educated at home may be influenced by financial factors. Social opportunities for kids exist everywhere, as long as parents are able to take advantage of them.

Parents who home school may be under financial pressure when it comes to signing up their kids for the various social activities in their area, many of which cost money to participate in. Unfortunately, parents may not always be able to pay all these costs, which ends up excluding the kids from these activities. As a home schooling parent, you also have to be careful that your children don’t end up wanting to attend a typical school. That can happen if the parents are a little overly zealous to protect their children from the world.

Home schooled children definitely end up with a different perspective than those who go to regular schools. Social skills are one of the primary goals of institutionalized education.

Yet it’s not only socializing that schools encourage, but also a respect for rules and authorities. To some extent, this is certainly necessary, yet there are also negative consequences to this. While obedience is necessary in some areas, when this idea is over-emphasized, a child’s creative spirit may be suppressed. Very often it seems that creativity can be stifled and even eliminated in the institutional experience.

There are many sides to the whole argument of whether homeschooling helps or hinders socialization in children.

Children who are home schooled often have the opportunity to experience a unique and thorough education. On the other hands, parents who also take on the role of teachers have to realize that their kids have social as well as educational needs. Each parent has to be aware and ensure proper and adequate socialization experiences are given to their children. There’s no reason a home schooled child has to be at a disadvantage socially, as long as parents make this factor a priority. howtoovercomeshyness.org/