It’s possible that for many readers, Futures has spent too much time focusing on what happened with MF Global and PFG and how their deceitful use, theft, bungling — pick a word — of customer segregated funds has stained the futures industry. Let’s move on, some say. It’s past.
But when people don’t ask “who’s to blame?” it ignores accountability. And for this industry to move forward, it must correct the problems that occurred; for an industry that largely relies on self-regulation, this is mandatory.
With that in mind, we decided to bring together a group of futures commission merchant (FCM) leaders to discuss their business, how it was affected and what they believe is good and bad with new regulations stemming from the 2008 financial crisis and the MF Global/PFG downfalls. We are fortunate to be based in Chicago, where five out of six of our FCMs are located. We were unfortunate that the roundtable was held during Hurricane Sandy, and some New Yorkers were unable to attend. Still, we got a good mix of retail and institutional firm representatives who were frank and insightful.
This roundtable discussion is part of our Top 50 Brokers coverage (see “Good, bad and ugly of a post-MF Global world”). We certainly appreciated the time and thoughtful two-hour discussion we had with these leaders: Gerry Corcoran, chairman and CEO of R.J. O’Brien; Scott Gordon, chairman & CEO of Rosenthal Collins Group; Joe Guinan, chairman and CEO of Advantage Futures; Peter Johnson, global head of futures & OTC clearing, Bank of America Merrill Lynch; Tom Kadlec, president of ADM Investor Services and Salomon Sredni, CEO of TradeStation Group. According to our 2012 Top 50 list, these six firms collectively hold about $21.3 billion in segregated funds as of September.
Although most of the discussion focused on life post-MF Global, the group said much of the industry’s sluggishness still is due to other factors, including the 2008 financial crisis and continued recession. Despite that, all agreed that restoring customer confidence in the system was the most important goal for the industry. ADM’s Tom Kadlec stated that he spends about 25% of his time now explaining his firm’s operations to clients who before might have taken it for granted. Every FCM said as much; in fact, they advocated having a smarter client base who asks questions. In a reversal of the “Know your customer” rule, they thought it positive that customers were wanting more information about the firm and asking to meet key people.
Regarding the drop in trading volume, many doubted that it was due only to MF Global/PFG. Each noted there were other factors affecting business: Lack of market volatility, especially in interest rates, the sovereign debt and European crisis, even the distraction of new regulations and infrastructures being put in place. These realities perhaps had a much larger impact on these firms than the MF Global/PFG fallout. In fact, many customers moved over to these firms, giving them a net business gain, but having to implement systems to get in line with the Dodd-Frank reforms has been costly.
Surprisingly, none were against the new rules stemming from MF Global. As Joe Guinan of Advantage Futures pointed out, it was a new rule implemented after the MF Global debacle that uncovered the PFG fraud.
One important change discussed was a restructuring of the FCM pricing model. FCMs are squeezed due to fewer income opportunities, low interest rates, new technology costs and additional exchange fees. Whether it is implementing OTC clearing into their platforms or absorbing new exchange co-location costs, all FCMs felt these price changes were key to survival. But it also means higher fees for customers. Restoring customer trust is one thing, but a better, more accountable regulatory system means higher costs — and somebody is going to have to pay.