FM: A few years ago smaller FCMs were looking at cleared OTC products as a way to compete with the largest FCMs; given what has occurred, is that desire still there?
GC: RJ O’Brien is sitting on the sidelines at this point on OTC cleared. It is a very complex product, it is a new build as Peter has mentioned. We like to participate in markets that we are very knowledgeable and very experienced at and we know very little about OTC cleared. We are hopeful that it will be a successful product in the industry as a whole. We measure ourselves in terms of decades and not years, so at this point RJ O’Brien won’t be participating in OTC cleared products.
SG: I would echo that. We are a futures group and we might understand a little bit about the products but we are going to stay with what we know best, which is futures and futures cleared products.
GC: To be clear I am talking about IRSs and CDSs, energy on Clearport and products like that we do participate in.
TK: We measure our capital based on our return on equity model. Peter talked about the large capital allocated to OTC type products. He didn’t mention regulatory cost; there is a huge regulatory burden in terms of knowing your customers and other things that is a stretch when the return is [uncertain]. I would side with Gerry and Scott; we are a futures firm — it is what we know, it is what our parent is very involved and engaged in and it is something we can do. If we can watch how the industry progresses and be a participant when it makes economic sense then we will look at it. But cost of capital is something that all of us are guarding very carefully as returns have come down because of interest rates and because of price pressures in terms of commissions.
FM: How big of an issue is customer confidence? Are you spending more time reassuring customers that you have proper risk controls in place and are protecting segregated funds?
SS: I speak to customers, but the challenge is that what happened at PFG was fraud. Ultimately, you can set up all the controls you want, but if you have a crook at the top what happened at PFG could happen again. So ultimately, when I talk to customers, what they have is our track record. We are a public company, we comply with [Sarbanes Oxley], we have a clean regulatory record; if you look at PFG, it was a mess. There were red flags all over the place. Assuring customers that what happened at PFG can’t happen again is tough because ultimately it is a matter of trust. Now a lot of good changes have happened. We as an industry failed because we didn’t have the right oversight.
SG: It has been a year now since MF Global and there is no question that customers are more diligent now. The issue becomes one of educating them. Prior to a year ago not too many customers understood the make-up of segregated funds. Even though the drumbeat has lessened a little bit, there was a time when our senior team was spending 50% of their time talking to customer [regarding] what we are about.
PJ: From my side, you are dealing with some of the world’s largest asset managers and hedge funds. They are looking at futures clearing and OTC clearing as one and the same. They want to make sure they are clearing their products, whether they are OTC or listed futures, in the same place going down the road. So you are seeing these large institutions conducting [request for proposals] to get the latest on FCMs’ capabilities with regard to futures and OTC clearing. The questions are the same; ‘Are our clients’ assets going to be safe?’ They have a fiduciary responsibility to ensure that’s the case. We end up doing a lot of on-site visits. We have the equivalent of a Treasurer that looks after client funds. She [and] our legal and operations people demonstrate the checks and balances that exist in our world to ensure client funds are safe. It is first and foremost in any large asset manager’s thinking in selecting a clearing broker.
JG: That same process goes on to lesser degrees with even a retail client. A retail client years ago might have thought of all futures brokers as equal and [cared] about who is going to give him the best rate by a penny, a nickel, a dime--that is where he would open his account. Now that sort of due diligence Peter mentioned that big money managers are going through, retail accounts are absolutely going through. It is not just who will give me the best rate, it is ‘tell me about your firm.’ They will want to meet the CFO, meet the treasury people, meet the compliance officer. I sense that some of what decision-making people are going through nowadays is a lot more of a thorough process even on an individual futures account.
[Because of] the tragedies — and it is horrible that people had to lose their money — a lot of firms have disappeared and the firms that remain are a higher caliber, better managed, more ethical [type of] firm. It is a tragedy that people had to lose money, but it is not a tragedy that the industry perhaps is weeding out firms that were poorly run; we end up with a better industry. We also wind up more aware now how inter-related we are to each other.