FCMs speak out

Some of our Top 50 brokers had a lot to say

In putting together our 2013 story on the top brokers, we sent a questionnaire to more than a score of industry leaders, getting their input on various topics. Many of these comments appear in the overview article, however, here is there one-on-one responses in full. (Listed in Alphabetical order by firm name)

Joe Guinan, Chairman and CEO of Advantage Futures (2013 ranking: #27)

  1. What are your thoughts on the Residual Interest changes made with the CFTC’s new Customer Protection rules? How will it affect the brokerage business overall? 

JG: The rule erroneously equates margin calls with debits and does so without regard to the size of the call relative to the account size (treating all margin calls the same regardless of the true riskiness posed by a given client). If a large double A credit insurance company has a margin call of $5 million, that is treated the same as John Q. Public having a $5 million dollar call. The situation doesn’t matter if the client has $150 million on deposit and has a $5 million call or if he has no money and a $5 million call. This is ridiculous! The impact will be for FCMs to require customers to hold larger excess balances in order to avoid margin calls causing a negative capital impact to the FCM—even from relatively minor market movements and position marks. This increase in margin required by FCMs effectively raises the client’s cost to trade. The need to resolve margin calls more quickly will tend to increase volatility at exactly the wrong time (during extreme market moves) as the FCM will be forced to liquidate more quickly (rather than take the appropriate time and do it in an orderly manner). The rule will also preclude people from initiating positions that may serve to temper a big market move (for fear of generating margin calls)—big moves in any market will be exacerbated by this rule. Intuitively, regulators should want to help foster liquidity that can dampen extreme market moves. This rule will force more intraday liquidation to avoid margin calls whenever a severe market movement occurs; some market segments may utilize alternative markets (cash or spot, forward, etc.) to hedge risk rather than deposit the extra funds, further reducing futures’ liquidity.

 2. We've seen a number of other Dodd-Frank rules come online over the last year. Have any of these had an impact on your business? If so, which rule(s) and how? How are you dealing with change? 

  • JG: There are now mandatory and severely punitive fines for irrelevant, immaterial rule violations that in times past were handled more reasonably. Not long ago, exchanges and regulators employed a ‘reasonable man’ yardstick in evaluating mistakes made by an FCM. If investigation revealed a minor human error had occurred and there was no pattern of negligence or deception, fines were usually set to a level acknowledging the error and economically encouraging FCM actions to minimize any recurrence. Now, in the after-math of the great recession, the overarching regulatory goal seems to be to fine every firm and market participant as much as possible for any infraction that can be identified. Their need not be malice or mal-intent or negligence—a simple minor human error can now be met with a severe financial penalty. Over time, this will certainly result in higher commissions and costs for clients as FCMs will be forced to pass along this higher regulatory operating cost.
  • There are relentless inquiries that drag on for months or years over insignificant issues or rules that can’t even be clearly defined as being violated.
  • It has increased the workload on the compliance, operations, IT and risk management staff with no apparent benefit to the marketplace. Importantly, the regulators also demand the time of the most senior people in the firm.
  • Educating the regulators requires enormous time from various employees—usually during the busiest of market conditions when we have the least excess capacity.    

  • 3.       Do you see any contracts with exceptional growth potential? Where is your main growth coming from: Domestic or international? Has China/Asia been a factor in your growth plans?

 JG: The VIX has been a rising star. There are some margin issues they need to and are resolving. Over the next few years the family of VIX products should see strong growth in volume and open interest. We have experienced more international growth over the past year as we have devoted more efforts internationally. China/Asia have been part of our international expansion as has London.  

4. Customer confidence continues to get hit with more incidents, such as AlphaMetrix’s cash flow problems. What actions have you taken to deal with client concerns? 

JG: Primarily we worked to clearly articulate our story because it resonates with traders. Advantage has NO proprietary trading. There is no affiliate or subsidiary trading proprietarily. Our entire company is dedicated to serving our clients and their trading needs. This clear story magnifies our client’s attention on those firms riddled with various conflicts of interest in servicing both prop and client trading. Post-MF, some clients were reluctant to leave the same amounts of money on deposit that they had in the past.  It took awhile for them to regain the comfort level that existed previously. It’s not all the way back even now. As a firm, we point to the great care we take with investment of customer monies. We post on our website each month a detailed analysis of how the funds were invested.    

5. So far there have been no criminal charges levied two years after MF Global went down. Do you believe the CFTC action is enough? Do you believe the changes made, such as the regular capital updates on NFA site, will help earn back customer confidence? 

JG: I think most industry insiders as well as the general public believe the top brass at MF Global committed a crime. At a minimum they seemed to be criminally negligent.

Capital updates, residual interest levels, and several other reporting items proposed or enacted are probably not especially useful to a customer and may well serve to harm smaller firms that don’t flash the “big numbers.”

Confirming the bank balances of FCMs on a daily basis represents one positive enhancement of the recent past.

6.Would merging the CFTC and SEC make your life easier, harder? Please explain.

JG: We can’t know in advance exactly how this would play out. It would likely be quite a mess. We want efficient and good regulators. We don’t necessarily need fewer regulators. A decade ago, NY State Attorney General Eliot Spitzer exposed the mutual fund timing scam that Wall Street firms were facilitating. The SEC completely missed this activity. The foxes have an ability to take over the chicken coops. Two regulators are better than one. 

7.       How is life with fewer (futures)/more (securities options) exchanges? How have exchange fees changed?

 JG: Most things in the futures arena are better -more portfolio margining for positions within one clearinghouse, we deal with the same staff for different markets. Compared to equity markets with bifurcated liquidity, futures exchanges with great liquidity and open interest look like they have a better formula for all the players. I think everyone wins with a centralized marketplace for liquidity in any given product. Exchange fees have been basically flat for some time.     

8. How has the futurization of swaps affected your business? Do you see it as a key area of growth? 

JG: So far this has not affected our business and we do not see it as a key area of growth in the near term.

 9. Do you believe that high-frequency or algo traders have affected the markets? Do they affect your business? If so, how? 

JG: Most high frequency traders provide a positive contribution to the marketplace. The massive volume they trade enhances liquidity trading at nearly every price. This benefits retail and institutional clients alike. We believe these traders benefit our clients. 

10.   Can you share three trends you see now impacting the FCM community?

 JG: Five years after the onset of the great recession, we have likely witnessed the peak in bond prices. As the fixed income market descends, volume and return on investment of client funds should rise concomitantly—benefitting the entire FCM community.

  • Greater regulatory costs will need to be passed on to clients in some manner.
  • As this rash of regulatory over-reach subsides, the FCM industry can focus on expansion and the exchanges can turn their attention to creating new products rather than jousting in Washington.

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Tom Kadlec, President, ADM Investment Services (2013 ranking: #13)

1.       What are your thoughts on the Residual Interest changes made with the CFTC’s new Customer Protection rules? How will it affect the brokerage business overall?

TK:  I remind all that the Commodity Exchange Act has not changed - rather CFTC is re-interpreting an existing rule.  Hopefully the upcoming RI study will be objective and truly consider the effects on FCM capital requirements and all costs that affect ADMIS core customers, namely the small and mid-tier farmer and ranchers. 

Over time, the rule will increase the amount of capital required to be maintained by FCM’s which will decrease our returns. 

It will also increase the frequency of wire transactions and the amount of customer funds posted at FCM’s, and increase the cost of hedging for mid-level accounts.  This will possibly drive customers to other risk management products such as crop insurance or off-loading production to large processors earlier in the cycle to avoid increased hedging costs. 

2.       We've seen a number of other Dodd-Frank rules come online over the last year. Have any of these had an impact on your business? If so, which rule(s) and how? How are you dealing with change?

TK: Dodd-Frank mainly affected banks, OTC participants and broker dealers. However, it has affected ADM Investor Services in several operational areas including our foreign exchange services, the risk controls surrounding our Give Up process, the recording of phone lines and the manner in which we prepare our Customer Segregation reports. 

When we deal with regulatory changes we need to take the time to fully understand the intended purpose of the legislation and how it affects ADMIS and our customers.  Additionally, we need to communicate the changes to our customers and brokers and help them understand how to implement and follow the new rules.  The CFTC, NFA, and the exchanges could help immensely with this by putting out guidance letters and white papers that bridge the gap between theoretical rules and the practical implementation of the new rules.

3.       Do you see any contracts with exceptional growth potential? Where is your main growth coming from: Domestic or international?  Has China/Asia been a factor in your growth plans? 

TK: ADM Investor Services continues to grow organically both domestically and internationally in our traditional areas of servicing hedgers and producers.  Additionally, we have seen significant growth in our managed futures offerings and institutional and professional traders. 

ADM Investor Services offices in Hong Kong, Taiwan, Shanghai, Singapore and Mumbai have experienced significant growth over recent years.  We – along with our parent company Archer Daniels Midland - view this region as an important growth area for our businesses.  We are using our international framework and presence to develop new entrants to U.S. and European futures markets.

4.       Customer confidence continues to get hit with more incidents, such as AlphaMetrix’s cash flow problems. What actions have you taken to deal with client concerns? 

TK: ADM Investor Services did not do business directly with AlphaMetrix other than providing them data per the CME requirement. We are a conservative company with strong parental oversight, and we support the vast majority of new reporting and customer protection procedures.  My colleagues at ADM Investor Services and I spend a great deal of time talking with our customers and listening to their concerns.  We know how important it is for them to understand our conservative financial policies and the extensive steps we take to safeguard their customer’s funds.  We do not proprietarily trade on a speculative basis or allow employees to speculate by trading futures; our focus is solely on servicing customers.   

 5.        So far there have been no criminal charges levied two years after MF Global went down. Do you believe the CFTC action is enoughDo you believe the changes made, such as the regular capital updates on NFA site, will help earn back customer confidence?   

TK: I trust the CFTC enforcement division will be thorough in their process and if warranted other parts of our legal system will get involved. 

Regulatory and exchange oversight, customer education and providing extensive financial transparency such as ongoing looks into each FCM’s capital are certainly part of the process.  These measures combined with a long period of time where no FCM’s experience problems will help restore trust in our industry.  At ADM Investor Services we know it is critically important to spend a lot of time talking to – and listening to – our customers and helping them to understand our conservative management processes and strong financial position.

 6.       Would merging the CFTC and SEC make your life easier, harder? Please explain. 

TK: Currently, ADM Investor Services does not interact with the SEC so this is a big unknown for us.  However, I would imagine that such a transition would be challenging if there are new rules and little support from regulators in understanding and implementing them.   It also may be a real challenge from a Congressional oversight standpoint.  It is worth noting that both the U.K and Hong Kong currently – and successfully - have one set of regulators for multiple asset classes.  If the U.S. wants to help harmonize rules across multiple assets classes and even the regulatory playing field this may be one way to move forward.

 7.       How is life with fewer (futures)/more (securities options) exchanges? How have exchange fees changed?

TK: Competition between exchanges often brings a direct reaction by the other.  A move toward exchange provided front ends is an example of this.  It is not in the best interest of an FCM – or, in my opinion the futures industry - for customers to bypass FCM pre-trade risk controls.  An exchange is not in a position to provide robust risk controls or complete proper customer due diligence.  However, there is a substantial push by major exchanges to drive customers to the proprietary trading platforms and compete for customer volume. 

 Exchange fees continue to be an area of muddled confusion for exchange members and customers.  I would urge exchanges to simplify the fee process and reduce fees accordingly.

8.       How has the futurization of swaps affected your business? Do you see it as a key area of growth?

TK:  ADMIS concentrates on cleared products so the transition is seen as a growth area for us; energy products are the early volume leader and an area of importance to us.

 9.       Do you believe that high-frequency or algo traders have affected the markets? Do they affect your business? If so, how? 

TK: High-frequency traders provide liquidity and market making capacity; they are vital to price discovery and efficient execution. It is up to exchange regulators and CFTC to ensure the market place is transparent and all transactions are executed in a fair and equitable manner. 

 

ADM Investor Services has a limited number of risk adverse high-frequency accounts and our customer’s benefit from the liquidity these traders bring to the futures markets.

10.   Can you share three trends you see now impacting the FCM community? 

 

  1. TK: Increased compliance and regulatory burden. 
  2. Low interest rate environment. 
  3. More than 60% of options trading is now executed electronically instead of by Open Outcry. 

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Pete Nessler, CEO of FCStone Group (2013 ranking: #18)

 1.       What are your thoughts on the Residual Interest debate, ie. the proposal to move from T+1 to just T? Please discuss a) if this is a realistic change, No  and 2) if not, why not? 

PN: The issue with going to a pure T calculation is the FCM has no opportunity to collect the margin funds from the client, this will require pre-funding or capital infusions into the FCM. 

 2.       We've seen a number of Dodd-Frank rules come online over the last year. Have any of these had an impact on your business? If so, which rule(s) and how? How are you dealing with change?

 PN: Yes. (see November 2013 issue for Pete Nessler interview).

 3.       Do you see any contracts with exceptional growth potential? Where is your main growth coming from: domestic or international? Has China/Asia been a factor in your growth plans? 

PN: Coming from domestic customers in more vertically integrated industries. Asia/China overall is a growth market that continues to expand, especially in metals and ags. Continued push in Central and South America.

 4.       Customer confidence continues to get hit with more incidents, such as AlphaMetrix. What actions have you taken to deal with client concerns? 

PN: We have continued to inform and educate our customer base about segregated funds and our investments in segregated funds.  

5.       So far there have been no criminal charges levied two years after MF Global went down. Do you believe the CFTC action is enough?  Do you believe the changes made, ie. Daily capital updates on NFA site, will help earn back customer confidence?

PN: No, do not feel CFTC action is enough. Yes, that daily capital updates are good.

 6.       How is life with fewer (futures)/more (securities options) exchanges? 

PN: Operationally it is easier but it does continue to introduce systemic risk into the business.

 7. How has the futurization of swaps affected your business? Do you see it as a key area of growth?

PN: We see large increases in block trading [already]. Yes, it will be a key area of growth.

8.        Do you believe that high frequency or algo traders have affected the markets? Do they affect your business? If so, how? 

PN: I don’t believe they affect the market for price discovery other than the time they are trading. At the end of the day the fundamentals are a large part of the price discovery. They do not affect our business.

9. Would merging the CFTC and SEC make your life easier, harder? Please explain.

PN:  I believe if the organizations were merged you would see better more effective rule making. 

10.   Can you share three trends you see now impacting the FCM community?

  1. PN: Increased costs to implement regulatory changes
  2. The blocking of the traditional hedger from the markets
  3. Decreasing number of FCMs

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Carl Gilmore, CEO of KCG Futures (2013 ranking: #26)

1.       What are your thoughts on the Residual Interest debate, ie. the proposal to move from T+1 to just T? Please discuss a) if this is a realistic change, No  and 2) if not, why not? 

 CG: First of all, it’s too early to tell how it all ends up working out. One thing I do applaud the CFTC on is taking a risk-based approach. I may not agree with them on what constitutes a risk-based approach, but their taking a risk-based approach in general is a good thing and is a better use of our tax dollars and their limited resources. The real answer, and I hate to say this, is who know how it is going to work out.

At the end of the day, it probably will drive margins higher, and that will mean FCMs will hold more collateral to avoid the effects of residual interest rules.

2.       We've seen a number of Dodd-Frank rules come online over the last year. Have any of these had an impact on your business? If so, which rule(s) and how? How are you dealing with change?

CG: We’re not a big swaps dealer. We’ve talked about swaps, but we’re just waiting to see how it all shakes out first. Dodd-Frank has been somewhat of a headwind for us, but not too difficult. To the extent that reforms are risk-based after the credit crisis, I’m all for that, but my view is the CFTC needs to do that in a well-thought out way.

Some of the rules have codified what all of the FCMs were doing in the first place. There’s regulation 1.73, the risk-management rule,  that has forced FCMs to formalize those processes. Our risk management was always about three things — identifying, measuring and managing our risk. After 1.73, it’s still about those same things, but what it has made us do is organize how we do things to comply with the rule.

3.       Do you see any contracts with exceptional growth potential? Where is your main growth coming from: domestic or international? Has China/Asia been a factor in your growth plans? 

CG: There are a couple of things happening. Of course swaps are one thing, but the traditional futures space needs to do a better job as an industry telling our story to the world. The metric that always gets used is that futures activity is about 8%-9% of all activity in the capital markets in this country. So, if we were to expand the users of our markets to expand by 5% and go to 13%, then the industry is now 50% bigger. I tend to see traditional market participants coming back in, including retail traders that had been on the sidelines.

Certainly Europe is a target market for us. So it’s a combination of U.S.-based clients in three or four particularly target markets — sophisticated intermediaries who are automated, professional market participants who are automated, professional commercial hedgers who are automated. Automation is the key for us. We are really concentrating on Europe and the U.S.

China and Asia are pretty fragmented. There’s a lot of growth to come there, but for us it is one thing at a time. We’re happy that after the last five years we’re still here, still in business, still part of the community. So, first things first. First we’ll grow our business here in the U.S., then in Europe, then we’ll go into Asia — I’m sure of that.

4.       Customer confidence continues to get hit with more incidents, such as AlphaMetrix. What actions have you taken to deal with client concerns? 

CG: What we have always tried to do is be as transparent and up-front as possible. I take the view that if the people holding your funds have integrity then your funds will be safe. So, we have instituted and reviewed all of our procedures internally, we have added new controls to expand on the controls we originally had, and we have tended to try and be as communicative and transparent as possible.

[Integrity is] one of those things that you know it when you see it. I applaud the regulators’ efforts to put new rules and regulations into place, and to the extent that they facilitate and promote transparency I’m all for that. It’s one of those things — futures business is not a big business. The more you talk to your clients and the more they talk to you, the more they ask questions, the better it is for everybody.

5.       Were the MF Global charges by CFTC enough?

CG: It’s hard to say, I only know what I read in the papers. Certainly I agree with Bart Chilton when he said, “If you’re going to do the crime, you have to do the time, not just pay the fine.” It remains to be seen.

6.      Would merging the CFTC and SEC make your life easier, harder? Please  explain.

 CG: It really is hard to say. We’ve talked about that in the past and it comes up from time to time, but I tend to take the view that any merger between the CFTC and SEC ought to combine parts of both. It shouldn’t just be a takeover of one by the other. There are good things in both of those regulators, and to really do it thoughtfully would be to take the best of both agencies.

7. How is life with fewer (futures)/more (securities options) exchanges? How have exchange fees changed?

CG: It certainly is evolving. One of the things that has happened over the last five years is the FCMs have been forced to become a lot better business people. We have to run our businesses efficiently in ways we never had to before. The ones that are still here are the ones that were able to adapt and run those businesses more efficiently, they are better run business than they probably ever have been, and end of the day that’s a good thing.

Dealing with fewer exchanges has its good points and its bad points. Overall, it has not been problematic for us.

[Regarding exchange fees} basic laws of supply and demand are there. More competition makes fees go down, less competition inevitably makes fees go up. The real point is there’s some elasticity there. Users of those exchanges and clearinghouses have a tolerance level, and the exchanges are pretty aware of that. So, their fees have been premium in comparison to some other areas of our business.

8.       How has the futurization of swaps affected your business? Do you see   it as a key area of growth?:

CG: It really hasn’t [affected out business] much. Our agency isn’t big into swaps, we’re taking a wait-and-see attitude.  I think we’ll make a decision in the next few months.

9.       Do you believe that high frequency or algo traders have affected the  markets? Do they affect your business? If so, how?

CG: HFT actually has a utility and a benefit. HFT isn’t going away. I don’t adhere to slowing them down. They perform a valid function in the marketplace, where the locals yelling and screaming at each other in the pit used to do that. As the trading has gone electronic, that’s where your pools of liquidity are. Certainly I want them all to operate as reasonably and safely as possible, but I don’t think they’re bad. Whenever regulators consider HFT, they need to take into account not only their effect on clients, but their effect on the marketplace itself.

HFT is [a part of our business]. We have a number of high-frequency traders. We are familiar with that business and we know how to do it safely. I anticipate that to be one of our key growth areas in the markets, particularly if something happens and we get some interest rate volatility. There’s really only five or six things you have to do on a pre-execution basis to make an automated system work correctly.

10.    Can you share three trends you see now impacting the FCM community?

CG: The regulatory environment continues to be a headwind. I see some positive trends in market participants coming back into the markets. There are some things lining up there economically to give us some additional growth over the next couple of years. I’m expecting some interest rates volatility in 2014. I suspect the trend of consolidation will continue, where it ends nobody knows. We will continue to have to be more and more efficient in the ways we operate these businesses, and that’s not such a bad thing.

It’s important to remember the FCMs provide an economic benefit to society. We facilitate the transfer of risk. The thing about the futures business is it is not here for capital formation, it is to facilitate that transfer of risk. To the extent the FCMs help facilitate that transfer of risk, they have a benefit to society and they ought to be able to survive. That doesn’t mean we have to run them better, which we’ve had to, it doesn’t mean we have to change our business model. I’m not of the camp that the intermediary FCM is dead. As long as we provide a benefit to society, FCMs will still be here.

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David Escoffier, CEO Newedge (2013 ranking: #4)

 1.      What are your thoughts on the Residual Interest debate, ie. the  proposal to move from T+1 to just T? Please discuss a) if this is a  realistic change, and 2) if not, why not?

DE: We appreciate that the CFTC has extended the status quo for the next twelve months, as well as adopting the COB T+1 Requirement at least on an interim basis. Nonetheless we remain concerned that customers could be required to provide full margin on trade date by the end o  2018.  During the comment period, FIA noted, as did Newedge, that the great majority of customers already provide their margin by COB on T+1. Thus, the COB T+1 Requirement should not have a substantial impact on FCMs, even to the extent they conduct a global brokerage business.

However, moving the requirement to trade date would, we believe, have significant consequences for customers and FCMs.  Most customers would be required to over-margin and/or pre-fund their collateral requirements, which would increase their trading costs substantially and might make hedging forward contract positions through futures markets less appealing. As a consequence, market participants could withdraw from futures markets completely which could result in increasing cost and decreasing supply of commodities.

No doubt, protection of customer funds forms the bedrock of the futures markets. That said, we believe the CFTC must clearly understand the consequences of its rulemaking activities. Cost of doing business in the futures markets should not hinder market participants from entering the markets or even squeeze smaller FCMs out of business as this would increase systemic risk in the industry.

2.      We've seen a number of Dodd-Frank rules come online over the last  year. Have any of these had an impact on your business? If so, which rule  (s) and how? How are you dealing with change?

DE: The section of Dodd Frank that has primarily affected Newedge is Title VII, which relates to the regulation of OTC derivatives.  Newedge USA and Newedge UK are both registered with the CFTC as swap dealers; as such, both are subject to all applicable swap dealer requirements. The swap dealer rules include, among others, reporting, straight-through-processing, business conduct, conflicts and supervisory requirements.  In addition, Newedge USA, as a futures commission merchant (FCM), is also subject to new swaps clearing rules issued by the CFTC under Dodd Frank, including the LSOC (Legally Segregated Operationally Commingled) rules.  Newedge has a strong governance framework in place to implement the new rules.  The firm has also participated in fashioning certain rules through the comment letter process, both individually and through various industry associations.

The implementation of Title VII has driven change in the futures markets:"Futurization" of certain swaps products, such as ICE Clear Europe’s energy products or several new products listed on SGX AsiaClear, is a new trend we have been observing. Another example is the lowering of block thresholds for certain products listed on CME.

Furthermore, the new regulatory framework has introduced major shifts in the way futures brokers conduct their business. We have invested significantly in infrastructure and skilled people to comply with increased reporting and risk management requirements, and in so doing, deliver the best service for our clients in the changing environment. In addition,costs have risen significantly due to new clearing and vendor fees and increased default fund payments and capital requirements.

Commercially sound brokers are vital to the overall functioning of both the exchange-traded and OTC markets with respect to mitigating systemic risk and providing customers with adequate choices for  clearing and execution. I advocate strongly that the cost associated with regulatory change is borne by all market participants based on their level of involvement and benefit.  

3.      Do you see any contracts with exceptional growth potential? Where is   your main growth coming from: domestic or international? Has China/Asia   been a factor in your growth plans?

DE: We have seen some contracts grow open interest.  For example NYSE Liffe US ’s suite of index and fixed income products.  We have also seen growth in commodity trading by traditional asset managers that are launching alternatives strategies and managed accounts.

Asia has continued to grow significantly and we are pleased to see further progress in China. With our joint venture, CITIC Newedge, we have been active in in mainland China for the past five years and are also actively involved in the local FCM community via the Chinese Futures Association. More mature markets in Asia, such as Japan, have also seen an uptick recently. Asia is key to the growth plans of mid-sized asset managers and trading shops headquartered in EMEA and the Americas.

From a product perspective, we have significantly broadened our OTC clearing offering to include OTC Interest Rate Swaps over the course of the past 18 months, delivering margin and reporting efficiencies to our client base.

Finally, we have expanded our footprint within the real money manager segment. More and more clients value our global reach, impartiality, diversified liquidity, cross-product capabilities, cutting-edge technology platform, and algos/transaction cost analytics.

4.      Customer confidence continues to get hit with more incidents, such as   AlphaMetrix. What actions have you taken to deal with client concerns?

DE: Newedge continues to take great care in operating our agency brokerage model, which provides clients utmost transparency. We apply rigid conservatism in terms of client money and how we invest our pools of segregated funds. We adhere to the rules by all major regulators and add strict governance as well as internal audits across the Newedge group, our shareholders, and many regulators.

5.      So far there have been no criminal charges levied two years after MF   Global went down. Do you believe the CFTC action is enough? Do you   believe the changes made, ie. Daily capital updates on NFA site, will   help earn back customer confidence? How is life with fewer (futures)/more  (securities options) exchanges?

DE: The customer protection rules are the bedrock of the futures industry and without strong enforcement of such rules, the industry will no longer be able to attract customers.  As a result of MF Global and Peregrine, we have seen regulators globally take many actions to shore up investor confidence in the futures industry.  LSOC in the US for example limited the types of investments that can be made with customer funds, require FCMs to certify and transmit daily computations of their customer funds to self-regulatory organizations and require FCMs to disclose the nature of the investments they make with customer funds.  More recently, the CFTC approved its customer protection enhancements, which will require FCMs, among other things, to make additional disclosures to customers relating to their business activities and implement robust risk management procedures.  We believe these and other changes have started to earn back investors' confidence in the futures markets and we look forward to further developments that will strengthen customer trust.  That said, the costs associated with such advancements should be borne by all market participants.

Futures exchanges have seen a consolidation in the recent past. For example, the Kansas City Board of Trade has now merged into CME, which previously merged with NYMEX.  We are witnessing the growth of SEFs, new facilities on which swaps products are traded, and believe that ultimately, there will be a consolidation in this market segment as well. There are now more securities options exchanges than ever, a trend that has clearly fuelled competition in the market place, but also bears adverse effects of market fragmentation.

 6.      How has the futurization of swaps affected your business? Do you see   it as a key area of growth?

DE: The futurization of swaps as well as OTC clearing are both major growth drivers for us at Newedge. Clients have turned more and more to deliverable swap futures and we are actively engaged with the respective CCPs as well as new providers and new exchanges such as GMEX and Eris. Overall, the futurization of swaps is completely synergistic to our business and as the market leader in clearing of listed derivatives, we welcome this trend.

Ultimately, it’s our clients who dictate where liquidity migrates and Newedge is renowned for providing access to an unrivalled breadth and depth of markets and our expertise in sourcing efficient and low cost liquidity pools.

7.       Do you believe that high frequency or algo traders have affected the  markets? Do they affect your business? If so, how?

N/A

8.      Would merging the CFTC and SEC make your life easier, harder? Please  explain. DE: We do not believe a merger of the CFTC and SEC is critical with respect to the regulation of joint FCM/broker dealers in the US.  Indeed, while the US is one of the few jurisdictions in the world that bi-furcates the regulation of futures and securities, there are numerous examples of instances in which the same entity is governed by more than one regulator. Close cooperation - in regards to the issuance of rules, examinations, enforcement and other matters - between regulators that govern a particular entity,  is critical to optimize their efforts and minimize any unnecessary disruptions to the regulated entity.  We would also like to see further harmonization of rulebooks to eliminate inconsistent, duplicative or overlapping regulations.  There are efficiencies and economies of scale in joint registrants - which often provide important benefits to customers trading across different asset classes - and such registrants should be encouraged.

9.      Can you share three trends you see now impacting the FCM community?

DE: The regulatory change that the futures industry has implemented been challenging, but it has also presented opportunities to innovate.  We are seeing new trading venues launch with new products in response to changing client needs - the new Constant Maturity Futures and its provider GMEX is an example. I expect to see similar projects and launches in 2014 and beyond.

Furthermore, managing cash and collateral have become more important than ever with banks facing term liquidity shortages and pressure to diversify their sources of funding in the face of Basel III and CRD IV. Centrally cleared OTC markets also require higher initial margin and collateral capital. Hence, cash has become an asset class rather than a borrowing class pre-crisis. Newedge, together with MTS, have anticipated this growing need and launched the Agency Cash Management Platform, a unique and transparent way to manage cash and collateral on an auction basis, in 2012. We have seen strong interest from major market participants in the past year and consider collateral management a major trend for 2014.

Examining the FCM community itself; three areas stand out.  One, I expect to see further consolidation in the market.  Regulation is making it harder for smaller FCMs to do business, and clients will gravitate to scale and proven expertise - i.e. the current top five players.

Secondly, is the issue of Return of Capital; regulators must be careful not to implement measures that are so stringent as to make it unfeasible for FCMs - even for those with scale - to do business.  For the sake of competitiveness and client choice, it is important not to drive participants away from the market

Finally, we will see more mutualisation of solutions and platforms between players in a bid to realise efficiencies by managing shared costs of doing business.

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Gerry Corcoran, Chairman & CEO, R.J. O’Brien & Associates (2013 ranking: #11) 

1.       What are your thoughts on the Residual Interest changes made with the CFTC’s new Customer Protection rules? How will it affect the brokerage business overall?

 GC: We believe the residual interest rule went too far. However, now that it has been decided, we just need to move on to implementation. The first changes will go into effect in a year, and we will modify our business to meet the new rule.  Those who do not wire funds will likely have to pre-fund their margin in order to comply with T+1. This will likely have a profound impact on those in the agricultural community – even before the “at all times” phase-in after five years – which is very unfortunate.

 2.       We've seen a number of other Dodd-Frank rules come online over the last year. Have any of these had an impact on your business? If so, which rule(s) and how? How are you dealing with change?

 GC: Since MF Global and Dodd-Frank, we’ve added two attorneys and five professionals to the compliance staff to address all of the new rules and regulations and their effect on RJO as a firm. We have successfully integrated these into our business and will continue to do so as regulators further refine the marketplace.

One of the greatest Dodd-Frank impacts this past year was RJO becoming registered as a swap dealer. Although RJO does not deal in what is commonly regarded as swaps (interest rate swaps, credit default swaps, etc.), we had to register because we have customers that engage in certain foreign currency transactions, such as non-deliverable forwards, that are deemed to be swaps under Dodd-Frank.  Therefore, we were required to implement extensive new internal and external policies and procedures and enter into complicated new legal and operational arrangements with prime brokers, counterparties and customers in order to be registered and comply with various Dodd-Frank requirements.  This was a very time consuming and costly endeavor for a limited part of our business, but nonetheless necessary as these types of FX transactions are important to certain of our valued clients that need to hedge their currency exposures.

Another large undertaking pertained to Chief Compliance Officers. While RJO already had a CCO, having to prepare for her to report on our compliance with all applicable CFTC regulations required us to take a hard look at our policies and procedures and complete a lot of work with respect to that.

Other items of notes are 1.71 (Conflicts of Interest) and 1.73 (Risk-based limits).

3.       Do you see any contracts with exceptional growth potential? Where is your main growth coming from: Domestic or international? Has China/Asia been a factor in your growth plans?

 GC: We’re seeing modest growth both domestically and internationally. In the last three years, we successfully established offices in Hong Kong and Beijing, and the region remains an important part of our growth strategy.

4.       Customer confidence continues to get hit with more incidents, such as AlphaMetrix’s cash flow problems. What actions have you taken to deal with client concerns?

 GC: We have found that largely our clients are satisfied that their assets are protected at RJO, and they understand how seriously we take the issue of customer protection.  We regularly keep our client base informed of our strict compliance with those measured designed to protect their assets.  This includes town hall meetings on customer safety matters with clients and brokers, regulatory/compliance calls, email updates, educational webinars and one-on-one conversations. Our clients understand we have an open door policy and encourage their questions and feedback.

 5.       So far there have been no criminal charges levied two years after MF Global went down. Do you believe the CFTC action is enough? Do you believe the changes made, such as the regular capital updates on NFA site, will help earn back customer confidence?

 GC: We believe that confidence levels are improving every single day. It will take time, but all of the measures that have been taken over the last two years are improving customer confidence.

6.       Would merging the CFTC and SEC make your life easier, harder? Please explain.

 GC: No comment.

7.       How is life with fewer (futures)/more (securities options) exchanges? How have exchange fees changed?

 GC: Our business is futures so we aren’t affected by the proliferation of securities options exchanges. Fewer futures exchanges can be helpful in terms of streamlining operations, but on balance, we favor capitalism and increased competition. To date we do not believe that exchange fees have changed substantially (Ed note: this was written prior to the new CME exchange fee increases was released).

8.       How has the futurization of swaps affected your business? Do you see it as a key area of growth?

GC: (see above)

 9.       Do you believe that high-frequency or algo traders have affected the markets? Do they affect your business? If so, how?

GC: Pass; this is not a focus of our business.

 10.   Can you share three trends you see now impacting the FCM community?

 i.                     GC: Greater transparency in terms of the financial strength and of FCMs and their relative risk to account holders and the industry at large.

ii.                    Consolidation of the FCM community: In a low-interest rate environment, in which there is slow growth in the industry and a high cost of compliance, we will see fewer firms able to survive and therefore consolidation.

iii.                  We expect the low interest rate environment to continue for the next two to three years, and smart FCMs will have to address their pricing structures and models.

 11.   Please add here any addition comments you would like to make. Thank you.

 GC: I’m looking forward to putting the new rules and regulations behind us as a given, and instead coalescing around a focus on industry growth.

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Scott Gordon, Chairman & CEO, Rosenthal Collins Group (2013 ranking: #19)

 1.       What are your thoughts on the Residual Interest changes made with the CFTC’s new Customer Protection rules? How will it affect the brokerage business overall?

SG: This has been a very complex issue, and like many firms, we filed a comment letter on the subject. As currently constructed with the phase-in provision, we have to be mindful of the prospective impact on clients whose livelihoods make it difficult to comply with the provisions. For example, smaller commercial hedgers, and also international clients, may have operational difficulty posting funds with their FCM to comply with the new deadlines being phased-in.

 2.       We've seen a number of other Dodd-Frank rules come online over the last year. Have any of these had an impact on your business? If so, which rule(s) and how? How are you dealing with change?

SG: We are not a swap dealer and do not participate in OTC products; therefore, much of Dodd-Frank does not affect us. But there are many customer protection rules and regulations that have been, or are being, implemented post-2008 financial crisis. Among the many areas covered, risk management and disclosure are significant examples of where RCG initiated modifications on our own before the regulators called for it. We previously identified a need for such procedures and processes, and implemented them as sound business practices that would protect the firm and our clients. It is difficult to gauge the effect that Dodd-Frank or other regulations have on business, but we are always mindful of the “cost” to the customer/end user, and we hope that the new rule sets do not drive business away from the exchange-traded markets we serve.

3.       Do you see any contracts with exceptional growth potential? Where is your main growth coming from: Domestic or international? Has China/Asia been a factor in your growth plans?

SG: We’ve been fortunate to see growth both domestically and internationally. We see significant potential in China and more generally in Asia and are actively seeking to do business in that region. The globalization of futures markets will continue to be a significant driver of business for RCG.

 4.       Customer confidence continues to get hit with more incidents, such as AlphaMetrix’s cash flow problems. What actions have you taken to deal with client concerns?

SG: We believe our clients place great value on our transparency, which is one of the ways in which we try to earn their confidence on a daily basis. We do this by maintaining an open dialogue, and our customers and brokers have told us they appreciate our efforts.

Even though we’re a privately held firm, we’ve been posting our audited financial statements on our website since the launch of the site over a decade ago. Beginning in late 2011 after the MF Global bankruptcy, we began posting on the site a pie chart detailing the allocation of where we invest our customer segregated funds. We believe we were the first firm to do this, and at the time, we updated the chart on a monthly basis. The week after the news broke about Peregrine, we began posting prominently on our website daily updates about these investments, and we continue to do so today.

 5.       So far there have been no criminal charges levied two years after MF Global went down. Do you believe the CFTC action is enough? Do you believe the changes made, such as the regular capital updates on NFA site, will help earn back customer confidence?

 

SG: There’s no question that there has been a great deal of anger and frustration over the past couple of years. We don’t consider it our place to determine whether the prosecution had enough evidence to file criminal complaints, or whether such action would satisfy those who have been harmed the most. We do believe that there have been very important rules and procedures put in place that greatly enhance customer protection. These include the daily confirmation of customer segregated and secured funds, which narrowed the verification window from up to 15 months to one day. Also the so-called Corzine Rule is another important change that requires personal sign-off by the CEO or CFO if a firm moves 25% of its excess customer seg funds.

Additionally, the CFTC customer protection rules finalized last week include approximately 200 pages of additional rules and regulations which will go into effect soon. Because of all these changes we believe confidence is in the process of being restored.

At RCG, we’ve been ahead of the curve on much of this and have implemented on our own many of the changes now being codified in areas such as risk management, internal controls, conflicts of interest, training and disclosure.

 6.       Would merging the CFTC and SEC make your life easier, harder? Please explain.

SG: This topic has been around for at least the last 20 years, re-surfacing every few years. It’s a very complex question, and the devil is in the details. I just don’t view that as a question we can answer without knowing more about how the combined entity would be structured.

 7.       How is life with fewer (futures)/more (securities options) exchanges? How have exchange fees changed?

SG: Our focus is on the futures side, so we can’t speak to the growing number of securities options exchanges. There has certainly been consolidation in all aspects of financial services – from insurance firms, to banks, to investment banks, FCMs and exchanges. Exchange fees have risen, and when we view this through the prism of the customer/end-user, we’re concerned about what that will do over time to their ability to manage their risk in a cost-effective manner.

 8.       How has the futurization of swaps affected your business? Do you see it as a key area of growth?

SG: We limit our business to exchange-traded futures and futures options, and we do not participate in OTC markets so we don’t see OTC swaps (or SEFs) as a major growth opportunity for us. As more swaps begin trading on listed futures exchanges, I’m sure we will see some client interest so from that standpoint we see opportunities to participate.

 9.       Do you believe that high-frequency or algo traders have affected the markets? Do they affect your business? If so, how?

SG: This is a complex topic since there are numerous forms of algorithmic trading which do not fit neatly into one bucket.  I believe the real debate is focused on High Frequency Trading (HFT) and how it affects the markets. For example, many electronic trading strategies involve algorithms but are not in fact “High Frequency”.  These types of (non-HFT) trades contribute liquidity and arguably tighten bid/ask spreads in some markets.  Although we certainly have numerous clients who use algorithmic trading, HFT doesn’t represent a large portion of our business so we are somewhat neutral on the specific HFT debate.

10.   Can you share three trends you see now impacting the FCM community?

 

a)       SG: Globalization: Futures markets have increasingly become global, and we don’t see that trend subsiding. The world looks to the U.S. as a model for innovation in futures – products that are transparent, liquid and safe. As these markets outside of the U.S. continue to grow, the safety and integrity of the markets will strengthen too.

b)       Focus: In today’s markets, an FCM just can’t do everything. So you’d better figure out your core businesses and focus like a laser beam on those.

c)       Consolidation:  With the combination of increased costs in meeting new regulatory requirements and higher technology costs, we expect to see continued consolidation amongst FCMs.

 11.   Please add here any addition comments you would like to make. Thank you.

SG: Despite all that the FCM community has been through in the past couple of years, I remain very bullish on the futures industry generally and FCMs in particular. I remember in 1998, there were those writing the epitaphs of the Chicago futures exchanges. And then the exchanges reinvented themselves and became highly relevant once again. There is tremendous potential in the FCM model, and no one should underestimate our ability to innovate and reinvent ourselves as new challenges come our way.

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Interview excerpts with : Don Roberts, Managing Director, Futures & Forex, ThinkorSwim by Ameritrade and Steve Quirk, EVP, ThinkorSwim, by TD Ameritrade (2013 ranking: #38)

Regarding the purchase of ThinkorSwim by TDAmeritrade:

SQ: Think about it, you’re not only changing the product mix, you’re changing the culture. I joke that in the early days when we would have an issue with routing, [TD] would say, ‘can you call us at 8 (am)?’ and I said ‘No, we need this fixed right now. There are people who trade 24/5, so you have to support them 24/5.’

We’re there hiccups, yes, but [TD was] intelligent in the way they let an environment and culture flourish, because that culture brings innovation. We are now 40% derivatives [revenues], but at the time of the acquisition, it was about 9%....[TD] saw this secular trend coming and they pounced on it and are being rewarded. So the last thing they want to do is take apart the bike and throw the pieces in driveway.

We’re not 180,000 clients, we’re 6 million. We get the bigger sandbox  with TD Ameritrade.

Clients want to do from one account, single account view.

DR: [Software] gave people who were solely active options traders  to be able to see the futures too.

1.       What are your thoughts on the Residual Interest debate, ie. the proposal to move from T+1 to just T? Please discuss a) if this is a realistic change, No  and 2) if not, why not? 

DR: Best thing when it came to enhanced customer protection rule was Commissioner Scott O’Malia, he made some great points, especially by asking did we study enough? The best thing they did was take an iterative approach. So if you came through the door with the sledge hammer, which they were going to do with residual interest, well, think about it, it would have forced a lot of people to pre-fund. A lot of these rules came out of MF Global and PFG]. But if Peregrine had asked you to prefund your account, he would had stole more. Instead of $200 million he would have walked out with $400 million. Corzine’s positions would have been exponentially larger. So the best thing  they did was take iterative [path].

SQ: if they would have mandated [T+0] it would have been carnage.

DR: And then prefunding would have hurt liquidity, and it sure it would have hurt the market. So now we have 12 months to get ready.

SQ: last thing you want is market movement based on mandated rules.

DR: Allowing for T+1 for a 30 month study period, see how affect markets and most importantly, liquidity, is a great idea. Did they kick the can down the road a little bit? Truth be told, they did. They left this for another commission to make a decision on.

SQ: At least they started it.

DR: Futures industry didn’t have all the hiccups, but got kicked in teeth twice and maybe it goes to thing that older rules haven’t been brought up to speed to modern times. And they’ve attempted to do it. There’s alot to be asked and answered. T+1  is at 6 pm, so when is that money in your hands counted as good money against the position? Because the Fed wire works in a batch file basis, what happens when the bank gets it at 1 pm and it’s in your name but you haven’t deposited to your account. ACH transfers go in at T+2, so when will ACH transfers count? Checks come into your office and you have to prepare them…does that money count?

D: Lot of the changes made up to this point changed the landscape quite a bit…like the chief compliance officer having to sign off, which came with Dodd Frank. These types of rules [made a difference overall]….It states firms have to take more accountability than previously.

2.  Do you see any contracts with exceptional growth potential? Where is  your main growth coming from: domestic or international? Has China/Asia   been a factor in your growth plans?

 SQ: Since 2008, equity volumes have been steadily declining …..for the past 10 years options volume has been a good secular trend, I think it’s 19% growth. So those have been growing at a healthy pace and we’ve been able to capitalize on that. Typically (TD) clients say they trade equities but then say [they] might want to write a covered call, so the progression is as a client becomes more able to trade those instruments, so wants to earn more income on my IBM so I write a covered call, or maybe something in the market scares me so I want a protective put. So once they’ve mastered that, they may want something with a shorter duration, which futures do, or they want to trade around the clock…we see a progression of these clients..once they get there, they say I have all these quivers sitting here , no matter how market moves, I’m equipped to handle.

 3.   Customer confidence continues to get hit with more incidents, such as AlphaMetrix. What actions have you taken to deal with client concerns? 

 

SQ: We surveyed our audience, it’s surprising how little they care…some bad eggs making poor decisions, and could live in any industry…as long as they trust us, and the security capital is guaranteed by us.

DR: We began trading on an omnibus basis…so we could give to the customers [confidence], we own your customers, our balance sheet. Not clearing other small firms.

4.  How is life with fewer (futures)/more (securities options) exchanges?  

SQ: “When you have 13 people competing against you, it drives the price down, and you don’t get that (with futures). “

We’ve told the futures exchanges ‘you  have an upside down model.’  In the retail (equity) side, the customer gets better treatment. First of all they have priority for orders to get filled. And transactional costs are lower…higher fees are for true institutional market  maker space….I’m not saying they should completely invert that, but to me (in futures) you’re paying 10 times as much as opposed to someone who is a professional…and HFTs get preferential treatment, and you want [retail] to come into your world? That’s a pretty big hurdle. The (futures exchanges) know this and they’ve made changes and are making changes.

5.  What are key trends?

DR: Continued consolidation with FCMS,  continuous low, non- interest rate is decimating their models. It’s a credit to a lot of them that they’ve hung on this far, right?

SQ: Flip side is it’s cleaning up the industry, must clean it to attract people [back] who have left.

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