A proposal for the creation of a “futures insurance fund” is being pitched by Commodity Futures Trading Commission member Bart Chilton.

Chilton, who announced his plan on Thursday, has floated the idea since the collapse of MF Global last November. He sees such a fund as operating similar to the banking insurance (up to $250,000) provided through the Federal Deposit Insurance Corporation (FDIC) and similar protections offered to investors through the Securities Investor Protection Corporation (SIPC) Fund when a broker-dealer is in liquidation.

“The support for such a futures insurance fund, at the time, was essentially zero,” Chilton said in a statement pitching his idea. “Nobody said they liked it.”

A complaint he heard from a member of Congress was that knowing there was insurance available would only encourage risky behavior by firms. His response is that such a fund should never pay out for trading losses or losses as a result of a downturn in the economy.

Another concern was that such a fund for futures customers would be excessively expensive. “I don't agree, and ask those who lost money if they would have wanted such a fund and there will be unanimity support of such a concept,” he says.

Chilton says the July collapse and apparent fraud of Peregrine Financial Group has given the idea for a futures insurance fund “some traction” and outlined how it could be created in a legislative proposal, the Futures Investor and Customer Protection Act (FICPA), that he hopes a member of Congress will pick up on.

His plan would extend the already existent SIPC protections available for securities customers to futures customers through a Futures Investor and Customer Protection Corporation and a fund it would administer.

The initial collection for the fund would be taken from a fee assessed on all futures commission merchants (FCMs), not to exceed 0.5% of the merchants' previous year gross revenue specific to futures. Determinations for setting assessment fees will be made by the FICPC Board.

Chilton recommends that revenues generated from commercial hedging or end-user customers receive a discount for the purpose of collections in order to encourage FCMs to provide these customers access to futures markets. 

After reaching its predetermined target level, as determined by FICPC and the Board (but never to exceed $2.5 billion), FICPC could lower or suspend premium collections.  Assets recovered by a FICPC trustee on behalf of a covered customer would be used to replenish the FICPC fund.

FICPC would be controlled by an appointed three-member Board of Directors, confirmed by a Senate majority vote. The CFTC and FICPC would operate in a relationship similar to that of the SEC and SIPC. “The operational expenses of FICPC would be minimal, and would initially consist of a staff not to exceed the current 34-employee total at SIPC,” Chilton says.