“The NGFA believes strongly that an extra 30 days, particularly given that three major holidays and related vacation time fall within the original comment period, is merited for review and comment.”
To date, I have focused my attention on the 35 or so responses submitted by various market participants. My initial reaction is that the proposals continue to strike a real chord with market participants. Further analysis suggests people are thinking about more than preventing speculative bets (MF Global) or preventing fraud (Peregrine). Instead, there are a number of suggestions written in plain English to rid the industry of previous flaws. Based on these comments, here are my key takeaways.
1. How can I learn more about my FCM?
Respondents are looking for more transparency from FCMs to help them make better decisions on which FCMs to use. Today, the CFTC publishes a limited amount of data in its monthly file of financial data of FCMs, an example of which can be found here. In order to supplement this information, respondents suggest a frequent publication, monthly or quarterly, of books and records, such as balance sheets and income statements, that clearly identify dangers and opportunities of FCMs in an easy-to-digest format. Others claim FCMs should also place additional information on their web sites regarding margin segregation calculations and information to any changes of disclosure documents.
2. How do I know that I can trust the information provided?
In order to pull this data together, respondents suggest that FCMs employ a Top 10 accounting firm to oversee firm activities. Having a neutral third party could provide investors with the assurance that, when performing their analysis, data has been validated by CPAs and accounting professionals. By cosigning on the official dotted line, the accounting firm would also be held responsible for any misrepresentations potentially reported by the FCM.
3. OK, but can anything be done so that I’m not the next farmer to be ripped off?
In actuality, the answer is probably “no,” but the industry as a whole is coming up with a lot of ideas to make it less likely. It has been just over a year (Dec. 2011) since the CFTC both revised the types of investments that an FCM can make with customer funds and restricted the netting of customer margin. Yet comments to the recently proposed rule changes suggest that further limitations should be made to CFTC Rule 1.25 and the nature of eligible FCM investment activity.
By this point, most FCMs would claim that they maintain a very conservative book, although some customers are interested in an “opt-out” document that would prohibit FCMs from reinvesting clients’ money, regardless of intent or risks assessed. Lastly, the “bad apple problem” seems to be addressed with a number of comments in favor of making it impossible for one individual to control or access customer funds held in trust at an FCM/RFED.
[Related: “There’s Still Work to Be Done to Rebuild Trust in the Futures Market”]
4. But what happens if my FCM still goes bust?
Industry debate around placing a portion of commissions into an insurable account is gaining a lot of traction. A public fund, similar to FDIC insurance, was first proposed by Commissioner Bart Chilton in August 2012. More recently, the private customer protection fund alternative, administered by the Commodity Customer Coalition (CCC) group, seems to be drawing some attention. Regardless of whether an insurance-type vehicle is publicly or privately run, contrarians believe the idea is window dressing for the end consumer and could unnecessarily raise the costs of trading. Meanwhile, advocates believe it is the best way to assure customers assets are secure, and better yet, bankruptcy court is avoided.
[Related: “Protection Fund: Building a Better Piggy Bank” (video)]
5. Who is bearing the cost of greater regulatory oversight?
Half of participants in TABB Group’s recent report, “FCM Business 2012: The Listed Part of the Equation,” believe a lack of revenue potential associated with changing existing customer segregation rules is having a material impact on their business. Both the amount of time and energy spent on educating customers and reacting to regulatory change is surmounting to far greater amounts spent by the industry than the total losses sustained by customers of MFG and PFG.
With limited upside revenue opportunity, it is also no surprise that most FCMs have also been hesitant to encourage more regulatory oversight of their business. That said, certain market participants suggest the internal whistle-blowing program needs to be further encouraged and more needs to be done by the FCM community to ensure compliance. Small requests -- such as the CFTC’s suggestion that acknowledgement letters between FCMs and DCOs be retained indefinitely rather than for the current five-year period -- can increase costs, however. TABB expects these items will eventually make it more costly for the end customer through higher commission rates.
6. So, does most of the industry agree with the proposals?
In our report, we also found that there is anything but a consensus view on the topic of restoring confidence in the futures industry. The combination of the MF Global and Peregrine collapses has not only been a catalyst for widespread debate on how better to protect customer funds, but also on the mechanism for discussing an improved futures marketplace. The fact that major FCM failures occurred in an industry that previously maintained a high degree of trust with its brokerage counterparts is now broken, and a full review is merited.
7. What’s the deal with Forex?
It appears that retail customers with foreign exchange accounts have been receiving separate treatment by FCMs. Many comments support the idea to require FCMs/RFEDs to segregate retail Forex customer funds in the US. This is an issue I am sure we will hear more about in the coming months.
The Bottom Line
To say there is a real disconnect between what regulators want to see occur and what market participants believe is the best approach is not accurate. Both parties would agree that there needs to be more education and stricter enforcement of the industry rules. With more attention on the key issues, such as those John Lothian News has been chronicling on its website dedicated to “Restoring Customer Confidence,” revitalized success and better trust of the futures industry will occur going forward. The challenge remains to come up with logical solutions that everyone can agree on and that can be implemented in a cost-effective and timely manner.