Regulators gone wild

Blog first appeared in DanCollinsReport on Sept. 26, 2013

Attorney Jeff Kopiwoda of Funkhouser, Vegosen, Liebman & Dunn and the rest of the panelists at Niba’s legal update panel last week had a tough job in explaining the Commodity Futures Trading Commission’s Rule 1.35(a).

The problem is having to explain and provide guidance for a rule that is not well thought out, unenforceable, conflicts with state laws and is generally goofy.

Among other things the law requires: “FCMs, certain IBs and RFEDs to keep a record of (and therefore tape record) all oral communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, whether communicated by telephone, voicemail, mobile device, or other digital or electronic media for a period of one year.”

Strangely this was a modification of a more stringent rule originally offered a year ago. “The final rule is materially different from the proposed rule,” Kopiwoda said, while trying to provide guidance and attempt to answer a difficult question for a compliance lawyer: “How would an audit ever reveal it.”

The answer is of course it couldn’t, but you can’t tell someone to ignore an illogical rule. And requiring associated persons of an introducing broker to record all conversations leading up to an order even if it occurs on your personal cell phone is illogical. The rule requires these recorded conversations to be linked to the trade, which can only occur in hindsight. It states, “The records [must] be kept in a form and manner identifiable and searchable by transaction.”

How do you make that connection after the fact? The transaction would be the last step. The problem is this rule was allowed to go forward without a great deal of thought.

Kopiwoda did provide some guidance such as preventing APs at your introducing broker from communicating through text messaging or other media that would make it difficult to keep a paper trail or recording. He also made those in attendance aware of potential pitfalls like state eavesdropping laws against recording private conversations. Apparently Illinois has one of the toughest rules; a violation of which is a felony. So by complying with this new rule, you can commit a felony, which could cause you to lose your license.

Commodity Customer Coalition co-founder and NFA Board Member James Koutoulas put it more succinctly: “The rule is absolutely insane.”

He might have also been referring to the new capitalization rules the CFTC is pushing that would dramatically increase the amount of margin futures commission merchants (FCMs) must post with a clearinghouse. Obviously the FCMs won’t post its own money. Allendale’s Paul Georgy, the guaranteed introducing broker representative on the NFA board joked, “If the capitalization rule goes through, we may not need to worry about rule 1.35.”

The implication being it will destroy many businesses. But implausible and highly disruptive rules with no logical purpose are not a laughing matter. Especially when the regulatory failures that perhaps inspired some of these rules were the result of poor enforcement efforts, not a lack of rules.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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