FM: Do FCMs need to create a different profit model to survive in this environment?
JC: You should build the profit model of a firm like MF Global independent of interest rates. You should have a model that will make money and be successful in serving clients in all environments. It is not acceptable to say that just because interest rates are low, you don’t have the ability to make money. You have to diversify revenue streams. That is one of the reasons I am so clear on saying we are going from a broker to a broker/dealer to an investment bank. That implies that we are searching for those places where we have natural connections to what we already do to diversify our revenue stream so that we are not locked into this view that interest rates or even commissions, which by the way are constantly eroding, [are the only source of income]. We want to do more than just collect commissions and generate interest income.
FM: The futures industry’s clearing and regulatory model has proven itself in the recent credit crisis. Do you think the industry has done a good job getting this story out?
JC: I can only look at the macro events that have occurred since 2008. We are moving very smartly toward clearinghouses and exchange-traded instruments as the foundation of a lot of the financial market activities in the years ahead, so people are moving smartly towards the model that worked pretty well during the crisis. Even in those places that broke down on an individual basis I don’t think there were any losses because the margining process and discipline on pricing worked and there was a systematic set of rules that were known ahead of time.
FM: By the time this is out we will know the final results of today’s election, but it is pretty clear that the Republicans will gain many seats. What will it mean to Dodd-Frank?
JC: As we sit here right now, we don’t know if the Senate is going to flip. It is pretty certain the House is likely to be in Republican hands and committee chairmen of those areas in the House that have oversight of the regulatory functions will be a challenge for those who want very aggressive rule making. It will be a court of appeals for those that think the rules as proposed are too tough… And then you have the question of how much financial firepower do the agencies get to investigate and enforce rules. It has impact on what the regulatory environment will be. Certainly, you will get more of a laissez-faire attitude out of the new Congress, which some like. Sometimes you have to be careful of what you wish for. It may be ok for my firm to say we have our house in order and we won’t make mistakes and cause other people problems, but somehow or another we ended up with a $17 trillion hole because people made mistakes in how they ran their businesses. It ended up impacting a lot of other people, including other firms. Last time I checked markets are up but I don’t think that value has been recouped. It will become a much more challenging environment to get things done particularly, things that are pro-regulation.
FM: What are the biggest structural changes you anticipate for the futures and financial services arena?
JC: This whole addition of new products, OTC products, onto the exchanges is by far the most important issue. The increased cross-margining arrangements that go on through clearinghouses is also a huge element of positive change that is coming in and around some of the reforms that are coming out.