Stephen Foley: MF Global mess shows need for drastic reform

US Outlook: Oh, 2011. Another year, and Wall Street invents another way for us to lose money we thought was safe.

Two months ago today MF Global, one of the world's biggest commodities futures brokers, filed for bankruptcy, and still we don't know what happened to $1.2bn that disappeared from supposedly segregated customer accounts. Hundreds of small firms and sole traders go into the new year without access to their cash, and the chances are they won't ever be repaid in full.

It's as if you go to the ATM and are told that half your money is gone. In the banking world, we have government-mandated deposit insurance to prevent these things happening, and to prevent bank runs that can bring the economy to its knees. No such thing, it turns out, in the world of commodities trading, which is why this part of the finance industry has been shaken to its core by MF Global.

Farmers and commodities buyers are looking at ways to cut out the middlemen, bypassing brokers and exchanges entirely by doing their own end-to-end deals. But only the big players can do that, which is why there is an urgent need for reform.

Brokers like MF Global are meant to keep client accounts separate from their own trading operations and the CME, which runs the exchanges where most commodities trading occurs, is meant to ensure that brokers are playing by the rules.

The whole mess has got commodities traders debating the question of whether a for-profit exchange can really be relied upon to regulate its own market. Imposing all that pesky paperwork kind of puts off its potential customers. Everything else being equal, brokers will gravitate to the exchanges with the laxest rules, the least oversight, the freest of free-for-alls, which is why these things are best imposed by government regulators.

Terry Duffy, CME's chairman, enraged traders with his "shit happens" testimony to Congress this month, in which he said: "Regulatory failures happen, unfortunately. Banks fail and ... the taxpayers get tapped. The laws prohibit Ponzi schemes, yet hundreds are detected every year after the public has been robbed and the money evaporated. Insider trading happens every day. Enron explodes, Lehman fails."

This is not a man who should be allowed to regulate anything.

For now, the CME is holding vigorously to the line that self-regulation and the system of segregated funds is working well, that the MF Global case can be explained by illegal actions at a singular company, and that all we need to prevent a repeat is an increase in the possible fines to deter transfers from customer accounts.

Many of the people affected by the MF Global debacle are individual traders and people actually working in the important agricultural sectors of the economy. They shouldn't have to simply adapt to the fact that their money could disappear at any moment. We should adapt the system to protect them, and that means broker-funded account insurance and an end to self-regulation by the CME.