Last updated: November 21, 2012 9:57 pm

Cantor fined for breach of fund rules

Cantor Fitzgerald has agreed to pay a $700,000 penalty and improve its internal controls to settle charges it breached a cardinal rule of futures markets by allowing a shortfall in customer accounts.

Cantor is a primary dealer and helps underwrite US Treasury debt auctions. The firm is involved in a range of businesses including commercial real estate, prime brokerage and gaming.

The US Commodity Futures Trading Commission sanctioned Cantor’s futures broker. The charges, which Cantor neither admitted nor denied, come amid heightened scrutiny of the sector after the failure of MF Global last year left a $1.6bn hole in its customer accounts.

Futures brokers are required to keep customer money separate from house funds. CFTC said that between January 24 and 26 Cantor maintained a shortfall in its customer account following the “inadvertent transfer” of $3m from the account instead of Cantor’s house account, as was intended.

The amount is small relative to the tens of billions of dollars of customer collateral held by the futures industry, but significant relative to Cantor’s futures business. As of January 31, the broker was required to hold $4.4m of customer funds in segregation, according to CFTC data.

The discovery of the shortfall will place fresh scrutiny on regulators’ ability to peer into the books of futures brokers. As a coincidence, the CFTC on January 25 announced that a “spot check” of US futures brokers ordered in the wake of the MF Global collapse had uncovered no material breaches of customer funds rules.

Since then, regulators have advanced new protections for customer funds, including provisions requiring brokers to report their segregation computations daily and giving regulators instant access to online bank records showing customer funds.

At Cantor, a spreadsheet revealing the shortfall was emailed around the company each day but employees responsible for alerting regulators to the problem failed to review it, CFTC said.

The discrepancy was only discovered after an operations department employee returned to work after being away on January 27. The operations department then transferred the $3m to customers, CFTC said.

Cantor senior managers remained unaware of the deficiency until mid-March when the broker’s industry regulator, the CME Group exchange operator, discovered it during a routine audit, CFTC said.

At that point, “Cantor provided the required, and long overdue, notification of the under-segregation to the CFTC and the CME”, the futures commission said.

Cantor could not be reached for comment.

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