The U.S. Commodity Futures Trading Commission has issued an order filing and settling charges against Mizuho Securities for failing to provide timely notice to the CFTC of secured fund deficiencies in violation of CFTC regulation 1.12(h) and for failing to diligently supervise its employees in violation of regulation 166.3.
The Commodity Exchange Act and CFTC regulations contain provisions to protect the funds of customers trading on both U.S. and foreign exchanges. In relation to customers trading on foreign exchanges, an FCM must account for and maintain money, securities, and property (collectively 'funds') in an amount at least sufficient to cover or satisfy all of its current obligations to foreign futures and options customers in a separate 'secured account'.
The funds in a secured account are referred to as secured funds. CFTC regulation 1.12(h) provides, in part, that whenever an FCM knows or should know that it has a deficiency in secured funds, it must report such deficiency immediately by telephone notice, confirmed immediately in writing by facsimile notice to the CFTC and the FCM’s Designated Self-Regulatory Organization (DSRO).
According to the CFTC order, as of October 7, 2011, Mizuho was required to hold $536,875,879 in secured funds, but held only $524,471,120 in its secured accounts, resulting in a secured funds deficiency of $12,404,759. Funds required to be held in secured accounts are distinct from funds required to be held in segregated accounts. Mizuho met its segregated funds requirements and had excess segregated funds of $122,564,573 as of that date, according to the order.
Also, according to the order, as of Monday, October 10, 2011, Mizuho was required to hold $564,203,212 in secured funds, but held only $523,184,067 in its secured accounts, resulting in a secured funds deficiency of $41,019,145. Mizuho met its segregated funds requirements and had excess segregated funds of $95,458,784 as of that date.
Mizuho became aware of its deficiency in secured funds on Tuesday, October 11, 2011, and cured it that same day. However, Mizuho failed to provide notice of the deficiencies on October 7 and 10 to the CFTC until Wednesday, October 12, 2011.
The CFTC order further finds that Mizuho failed to diligently supervise its employees by failing to provide adequate employee training regarding their obligations to comply with regulation 1.12(h), and because Mizuho did not have policies or procedures in place mandating immediate notification to both the CFTC and its DSRO of any segregated or secured fund deficiency.