It has been a strange year for the futures industry. Despite increased volume and open interest, there has been unease because of the uncertain nature of the regulatory structure. The specter of Dodd-Frank and what it could mean for the industry has been an annoyance, but a common refrain from within the regulated futures industry is that its market structure worked flawlessly during the financial crisis. However, as we roll out our 2011 Top Brokers feature, a scandal is hitting the futures industry that extends far beyond the failure of a large member firm, striking at the core protections the industry has been patting itself on the back over since the financial crisis hit. An apparent shortfall in segregated funds at MF Global calls into question those protections.
On Oct. 31, MF Global Holdings Ltd. filed for Chapter 11 bankruptcy protection sending MF Global Inc, into liquidation. But the fate of the eighth largest futures commission merchant at the time as measured by customer segregated funds is not what is causing so much concern. Rather, an apparent shortfall in customer segregated funds scuttled a sale to Interactive Brokers Group and began a disorganized liquidation process, which had customers trying to see who had their back and discovering no one did.
"It’s the most disruptive and disorganized transition of business that I’ve ever encountered," says Marc Nagel, COO of Dorman Trading.
Newedge CEO Nicolas Breteau says, "The industry needs to step up and restore the confidence in [client] protection. That is really the first lesson that we take from it. How do we as industry participants make sure that we are very transparent in how we protect customer funds?"
Thomas Peterffy, chairman and CEO of Interactive Brokers Group, calls it an ongoing crisis of trust. "Up until MF Global, the crisis was more on the securities side than on the commodities side."
Breteau says "it is a reality" of Dodd-Frank. "The cost of running the business is higher but let’s face it: It is a legitimate response to what we are facing. Our world has changed so there is no way after the events we have witnessed — one of them just happened in the heart of our industry — that we can shy away from those responsibilities. It is a duty we have to our clients to increase supervision and control."
Newedge is preparing to be a player in the cleared over-the-counter (OTC) trading world and has taken an active role in trying to shape the rules. "We contributed a lot in terms of writing letters to the regulator in order to express our clients’ views on topics," Breteau says.
OptionsXpress EVP Futures Dan O’Neil says, "[Dodd-Frank is] a huge law with countless provisions. We have legal and compliance people looking at it day and night, and we’re certainly going to be ready for the new rules it puts forth."
While some FCMs are preparing for its inevitability, others are weary of its uncertainty. "We are waiting for the rules to be finalized," says Rosenthal Collins Group CEO Scott Gordon. "There is [definitely] uncertainty with respect to what will ultimately come out but there is not much we can do about it so we are just going about our business."