Thomas Kadlec, president of ADM Investor Services, agrees. "We don’t know what the final rules are going to be so we have not invested a great deal of time and capital in the process," Kadlec says. Peterffy adds, "We wouldn’t want to spend any time and energy until it is finalized."
A year ago Peterffy argued for CME Group to set up a separate clearing pool for cleared swaps, which they did, but is unsure whether IB will get involved. "We have been considering doing it but every time we look at it we say let’s wait until final regulations come out. It depends on transparency; we are extremely risk conscious. We always prefer trading on exchanges with transparency than over-the-counter without transparency," Peterffy says.
Kadlec and others are worried about unintended consequences and he points out there already have been additional requests from regulators. "We are getting many more questions from the exchanges and the CFTC in terms of looking at customer positions and how we go about our day-to-day business," Kadlec says.
For some FCMs it’s a matter of how the rules will affect their core business. "There’s very little of Dodd-Frank that’s been passed thus far that will affect us," says Nagel. "We’re of course affected by things like position limits, which [recently were passed], but we haven’t seen them yet. It’s not like we know exactly how we’re going to be affected."
He, too, is worried about unintended consequences. "What remains to be seen about Dodd-Frank is whether or not there are unforeseen consequences to the actions they’ve taken. On the whole, this may be a negative for our industry. There will be a lot more regulation, a lot more compliance, a lot more money spent on those things than customers who are actually protected," Nagel says.
A year ago the non-bank FCMs were complaining that CME Group set too high a capital bar, $1 billion, for them to get involved in cleared swaps. Recently the CFTC lowered that bar to $50 million but there appears less enthusiasm for entering the space. Newedge still is working on being a player though Breteau is taking a cautious approach.
"We have been vocal about the level of capital required and making sure that the space not be kept as a private club, but that it would be open to numerous participants, the same way we compete on the listed side. That is the best way to guarantee transparency and efficiency in the market," Breteau says, while adding, "Reducing capital doesn’t mean a small firm should be entitled to clear as much as it wants. What really matters is the quality of controls that are in place."
Peterffy is concerned that lowering the bar will add risk. "I think $50 million is dangerous. We have $4.7 billion in capital so we prefer people who have [more] capital because if the clearinghouse loses capital then the members are assessed. The little guys only can be assessed to the extent that they have something to give."
Peterffy is most concerned over the movement of trading onto transparent exchanges. "We need trading to take place on exchange platforms; all trades [should] be reported to clearinghouses, and not too many clearinghouses because too many clearinghouses are just like too many firms. When you have too many central clearinghouses they are not really central anymore."
While there is still resistance there is also a sense of inevitability and, of course, the MF Global situation is a game changer.
"As leaders of this industry [we need to] reflect on what additional level of transparency and supervision could we bring to our clients because as industry leaders, we have a duty to [do so]," Breteau says.