FM: What will a typical FCM look like five years from now?
SG: That is a really difficult question because if you has asked that question in 2007 and asked where will [we] be at the end of October 2012, I would not have predicted where we are. I can’t predict five years out. We can make business plans based on the next 12 to 24 months, but a five-year period is [tough]. There is a paradigm shift going on in the futures business [in terms of] the FCM model, the exchange model, the regulatory model, the customer model and the macroeconomic model. That is going to play out over a period of time.
JG: It became much harder to predict than it was before. Prior to ’08 you could get a good idea about the next year-and-a-half, but since the fall of ’08 I have found my own visibility of [what] the next [few] year are going to be like very cloudy in terms of volume and customer base growth.
SG: FCMs are adapting to the environment. I am bullish on the FCM sector. I can’t speak for exchanges, I can’t speak for regulators but I can speak for our FCM. We are making the right changes. Customers believe in our markets in terms of allowing them to manage their risk. I am bullish on the futures industry; it has secular growth that goes up and down based on cyclicality.
FM: Have ETFs taking business from futures?
GC: I don’t think we would be immediately aware of it. Somebody that might want to play in a commodity ETF or energy ETF or a metal ETF, that person would look at it as a way to get a little exposure to silver or gold or crude oil. They would be better off buying a commodity contract or CRB index.
SG: It is accretive. Whether you have stocks vs. futures, whether you have ETFs vs. futures, whether you have OTC vs. futures, that is what builds markets. We might not play on the OTC side [but] in general futures markets benefit from people in the OTC business coming over to manage their risk. I have no idea if we lost business to ETFs but I am not worried about it because in the end we end up getting business from them.
FM: Since the credit crisis hit, many of you assumed there would be a greater regulatory role but a bigger problem may have been the uncertainty surrounding rolling this out. This has dragged out. Is the uncertainty a bigger problem?
GC: Uncertainty is not good. It is challenging to run a business one year out and thinking two or three years out because of the uncertainty of the framework we are working with. Is it a dramatic impact on the business? Probably not, but uncertainty is one of the elements that cause business managers to think twice before making investments. If you make an investment in a line of business or a particular product and regulations aren’t out yet and they change course, it is a problem, so lots of folks are waiting. The whole Dodd-Frank rules and regulations, how they are unfolding, how they will be structured is holding back the industry so that uncertainty is not good.
SG: That is an important issue. Everyone out there [is affected by] that uncertainty.
JG: I had a client get a call in May from the CFTC. The CFTC never asked me, they never told me but they called one of my clients directly and told him that they wanted to visit. The guy called me almost in tears, ‘What am I doing wrong?’ And he was doing nothing wrong. He said ‘Maybe I should stop trading futures and go back to trading stocks’ because he felt intimidated, so there is some of that nonsense going on. The good news is that they assured him that he wasn’t doing anything wrong but it still rattled him because he feels he is on somebody’s radar and he doesn’t want to be on anyone’s radar.
GC: Along with that, the division of enforcement has been extraordinarily aggressive in the futures industry in the last couple of years. I mean prior to MF Global. Jamie Dimon said this about the banking industry, ‘When does a mistake become an enforcement action?’
In the course of executing day-to-day responsibilities, in FCMs and other businesses mistakes happen; early detection because of good internal controls mitigates these mistakes and 99.9% of the time there is no harm and no foul, but in today’s regulatory environment the division of enforcement may take an action against an FCM.
FM: Do you feel they are being overly sensitive?
JG: They are still trying to solve the financial crisis so [if] you did some little thing, they want to fine you like you are the bad guy who caused the great recession.
TK: I don’t think anyone is trying to maliciously avoid rules. We have a fiduciary duty and live it on a daily basis. Gerry said it very well, I work for a big company and perception is critically important. To manage the perception that they have for us, that we are rule followers and we have the ADM way that we practice and we are indoctrinated in, but that doesn’t mean anything to the CFTC and it is frustrating and it’s challenging. At times you feel like a scapegoat.
FM: How important is it for someone to be charged in the MF Global mess, to be kicked out of the industry?
JG: It helps to have a period at the end of the sentence.
GC: I am dismayed that there hasn’t been at least a statement, a disclosure by the regulators — what have they found, what have they not found. It has been a year; we have had the trustee’s report, which is pretty scathing, but we have not heard from the regulators at all as to where the investigation stands right now, whether it be the U.S. Attorney or the CFTC.
FM: What is the biggest issue for FCMs?
SG: Restoring customer confidence.