Five years is a long time. Think about it: In 2008, the financial markets were in upheaval, still reeling from the failure of Lehman Brothers and the infamous bail-out of the too-big-to fail firms. Since that time the U.S. Congress wrote and passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandating that the various regulatory agencies put in place rules that would stem some of the bad behavior that happened during the financial crisis. A lot, it seems, can change in five years.
For the derivatives industry, the financial crisis volatility that many survived was hit with customer confidence issues caused by the failures of MF Global and Peregrine Financial Group. With the new customer protection rules released by the Commodity Futures Trading Commission (CFTC) in October, the mandated residual interest rule was put in place.
This rule basically forces brokers to shorten the current time they collect margin from customers to one day, and in five years, to the following morning. Although many firms are electronic, hence collect payments at T+0 and T+1 rates, some have a large group of clients that still write checks. To make this change would mean pre-payment of the account, something that could curb usage of the futures markets. But, as Mike Dawley, managing director of global futures and OTC clearing securities division of Goldman Sachs, noted on an FIA Expo panel, “who knows who will still be around in five years?” This highlights what many in the industry believe, that T+0 will never happen, although T+1 is a good bet. Don Roberts, managing director of futures & forex for ThinkorSwim, the derivatives arm of TD Ameritrade, summed it up that the regulator (like Congress) “kicked the can down the road.”
This is only one of the many issues on which we questioned a score of top futures commission merchants (FCMs) to discuss for our annual review. New regulations and compliance issues have become such the focus the last few years in the business, brokers seem to finally see the light of day and are getting back to real business. Matthew Simon, senior analyst and head of futures research at TABB Group, which just completed its annual FCM study, noted that after the past few years with the failure of MF Global and PFG, the shrinking volumes, low interest rates and continuous money flowing out to keep up with compliance, “this year we found more optimism,” he says. “Not so much that volumes will grow [rapidly], but that efforts put in terms of [futurization of swaps], and that rules that were talked about for years are now a reality and [FCMs] can get back to making money on executing trades.”
And he’s correct, except that there still is some anger about some of the regulations. Joe Guinan, chairman and CEO of Advantage Futures, believes despite being one- and five-years out, the residual interest rules border on “ridiculous.”