From the February 2014 issue of Futures Magazine • Subscribe!

Who's looking out for the little guy? Apparently not exchange or regulators in 2013

Profit centers

The for-profit model pushes exchanges to attempt to create profit centers from what used to be member services. 

Pat Kenny, senior vice president of CQG, says the change often favors one participant or type of participant over others, and cites a policy that Eurex imposed in the middle of last year. When his company introduced a simple charting interface for customers, Eurex started charging those customers $75 per month — a fee that customers didn’t face if they went through companies that only had prices but no charts on their screen.

Neither he nor Haworth are averse to competition or profit, but both say the self-regulatory and communal functions of an exchange might best be served with a different governing structure.

“When things were good, they were sometimes cutting exchange fees,” says Kenny. “Everybody was in it together on the basic infrastructure, even though we competed on everything else. But as a for-profit organization, that’s gone right out the window.” 

Regulatory focus 

On the regulatory front, reforms designed to incorporate the unregulated world of over-the-counter (OTC) derivatives into the well-functioning and well-regulated futures apparatuses are instead hobbling what works and ignoring the issues that need to be fixed — largely because the major investment banks and housing scammers who created the 2008 crisis have been able to soften the impact of Dodd-Frank on their operations, while less-powerful but better-behaving players are left with a greater regulatory burden.

The futures sector has, of course, suffered two major regulatory failures of its own — namely the coopting of customer funds by CEOs at MF Global and PFG — but instead of addressing these, the CFTC has peppered the sector with regulations many of which will add costs to end-users.

Take the CFTC’s “residual interest rule,” which is really a reinterpretation of an old rule and requires FCMs to deposit money into segregated funds to cover customer margin calls until the customer money arrives. First, it doesn’t really address the issues raised by PFG and MF Global (in fact it could aggravate it), because it might even force FCMs to get more money up-front from hedgers, who in turn are the very people the entire futures industry exists to serve. This and a related rule that requires FCMs to take capital charges for unmet margin calls seem designed to prevent undercapitalization, but they do nothing to keep unscrupulous FCMs from digging around in customer funds.

Instead of preventing future digressions, the CFTC has been reaching back in time to carry out enforcement actions on companies for technical violations of rules involving customer segregation years ago.  A cynic might suggest these actions were taken to justify its residual interest reinterpretation or that there is a problem if it takes so long — one enforcement case cited a five-year-old violation — for the regulator to act.  

Even National Futures Association (NFA) President and CEO Dan Roth pointed out that the “new” rule would not have prevented either the MF Global or PFG debacles, and one of the panelists at a recent House Agricultural Committee hearing correctly pointed out that it could have doubled the losses of customers of MF Global because they would have had higher margin requirements.

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