One thing the MF Global collapse has done is shine a spotlight on the investor safety nets in both Canada and the United States. It turns out one of them is pretty well constructed – if a little slow to unfurl – while the other one is riddled with gaping holes.
And guess what? No matter how much we might like to grumble about the inefficiencies of Canada's securities regulatory system, when it comes to catching investors who are falling from a collapsing brokerage firm, this is the place to be.
Until now, the Canadian Investor Protection Fund's (CIPF) biggest cases – which, thankfully, have been few and far between – have involved home-grown failures. The MF Global bankruptcy, with its cross-border nature, has afforded us a rare opportunity to see both the CIPF and its U.S. equivalent – the Securities Investor Protection Corp. (SIPC) – in action, side-by-side. It's like the Pepsi Challenge of investor protection systems.
And with a commodity-futures-centric brokerage firm such as MF Global, it didn't take long to discover which one left the foul taste in investors' mouths.
It turns out that the SIPC doesn't cover futures accounts. If you were trading commodity or financial futures through MF Global and you have funds that are missing, the SIPC won't give you a red cent to make up the difference.
The SIPC does protect MF Global's U.S. customers' traditional securities brokerage accounts – basically, stocks and bonds. But only about 1 per cent of MF Global's 50,000 U.S. accounts were securities accounts.
CIPF, by contrast, covers all investment accounts at CIPF member firms, regardless of whether they hold stocks, bonds, futures or currencies.
This massive hole in the U.S. protection system is an unfortunate accident of history.
The U.S. Securities and Exchange Commission deals with stocks and bonds, and it's the SEC's regulatory framework from which the SIPC emerged in 1970. The regulation of futures – an asset class that, at the time of the SIPC's creation, was of no interest to the average investor – evolved entirely separately, and is overseen by the Commodity Futures Trading Commission. Even as futures trading emerged as a vibrant product for retail investors in recent years, neither the CFTC nor the futures-trading industry have seen fit to set up an investor compensation fund similar to the SIPC. (The big U.S. futures-market operator, CME Group Inc., has offered financial guarantees to MF Global's U.S. bankruptcy trustee to help it return some money back to clients, but it does not guarantee investor assets held by its member brokerage firms.)
Even for the handful of MF Global's U.S. clients who are protected by the SIPC, coverage pales in comparison to the backstop the CIPF provides for Canadian clients.
In Canada, each account (with a few exceptions, mostly involving insiders) is eligible for reimbursement from the CIPF of losses up to $1-million in the event of an insolvency. There's no limit on the cash portion of these reimbursements; the entire amount can be taken in cash, if that's what the client lost.
The SIPC? It covers the first $500,000 (U.S.) in losses for each account. And it has a $250,000 maximum on the cash portion of any claim.
Anyone feeling like joining me in a chorus of O Canada right about now?
Sure, plenty of Canadian investors haven't been thrilled with the way MF Global Canada's bankruptcy has played out. The Canadian arm of MF Global's empire wasn't actually insolvent (it was forced into bankruptcy due to a short-term capital shortfall, when funds residing south of the border got frozen in its parent's U.S. bankruptcy), and all of its funds appear to have been present and accounted for, yet Canadian clients went weeks with their accounts frozen, unable to trade or even to get to their cash. And the regulators, the CIPF and the court-appointed trustee haven't done the best job of communicating their progress to nervous stakeholders.
Still, Canadian clients have had their accounts transferred, intact, to other brokerage firms: it doesn't look like anyone is going to lose a penny. MF Global's U.S. customers – with a long road and a lot of questions ahead of them, and a weaker protection system to help them – can only wish they could say the same thing.
Editor's note: The Canadian Investor Protection Fund covers all accounts at CIPF member firms. Incomplete information appeared in an earlier version of this column.