Your FCM; Hero or Villain? Part II
September 25, 2012
Although it seems like only yesterday the National Introducing Brokers Association (“NIBA”) panel on “Assessing FCM Risk” took place over two weeks ago. If you were part of the standing room only audience thank you for attending! Your support meant a great deal to NIBA, Turnkey Trading Partners, and the other panelists. If you weren’t able to attend this year’s Chicago conference the following is a quick overview of what was discussed. If you’d like more details please see my pre-conference article “Your FCM; Hero or Villain?” or feel free to contact Turnkey Trading Partners at any time.
1. Review Previous Regulatory Violations: Remember that not all regulatory violations are created equal. As an example violations for sales practices and advertising can be much different than violations in capital sensitive areas. Investors should approach with caution firms that have previous anti-money laundering or capital level infractions. Also, always be sure that prior to investing money with an FCM a review of all applicable regulator websites is conducted. The BASIC system can be found at NFA’s website and Broker Check can be found at FINRA’s website. Each system, when used in conjunction with a quick web search, can return valuable due diligence information. Also the CFTC makes available (NFA will soon as well) FCM financial information for your consideration.
2. Risk Index Rating Recommendations: We discussed several companies that specialize in the publication of FCM risk indexes. These firms have made an attempt to rank the likelihood that your FCM could be the “next big failure.” Although some of the variables they consider can be useful in determining if an FCM is a good fit, not all of their considerations are helpful or relevant. Those in attendance will recall that some index firms ranked side by side public (accept retail customer funds) and private (trade only proprietary monies) FCM’s which skews ranking results. Other firms analyzed companies who do not transact in commodity futures at all even though they may be listed as an FCM. The take away for investors is that there is no simple “one size fits all” model to index risk within the FCM community. Although doing so may be time consuming and tedious, investors need to conduct a wide range of due diligence to gain a level of comfort with their specific FCM.
3. Corporate Structure/Bankruptcy Considerations: John Roe (“Mr. Roe”) from the Commodity Customer Coalition (“CCC”) raised a variety of valid points related to the structure of your FCM. Is the company publically or privately traded? Is the company a single corporate entity or a group of affiliated, comingled business lines each with a different corporate structure? How is the business registered; as a clearing or non-clearing FCM? Who ultimately holds customer deposits? Your FCM? An Affiliate of theirs? The answers to these questions (among others) and the wide array of implications to those answers were discussed in detail.
4. What Can/Should Be Done: After working through the aforementioned items we discussed what can, could, or should be done within the industry to solve the FCM insolvency problem. I presented my thoughts about our morality as a people and within the industry. Specifically I shared that if we really believe no person should be able to aggress against another person or their property we must begin swiftly putting the people violating this consideration in jail. I continued by sharing that a lack of oversight in the futures industry was not the direct underlying cause of the MFG and PFG insolvencies. I further went on to explain that new regulations, although perhaps well intended, often bring about unintended, undesired consequences. That no amount of regulators, auditors, rules or other preventative measures will make a difference unless those responsible are fully and severely punished for their violations of already existing rules. Building off of this Mr. Roe suggested several practical ideas that are being considered for implementation within the industry. They included, but were not necessarily limited to; the creation of a customer protection fund, various legislative reforms, and several alternative account segregation options.
Through the FCM Risk Assessment panel I believe we showed that even during these trying times an individual investor, commodity trading advisor (“CTA”), Introducing Broker (“IB”), or any other market participant has a variety of ways to proactively monitor their FCM(s). All in all the 2012 NIBA Chicago conference was a huge success for the panelists. It is our hope that our presentations and the information we provided was valuable and timely for all of those who attended.
James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in many investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations. Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements. He has been qualified in Federal Court as an expert witness and has provided testimony on a variety of CFTC and NFA related industry activities. Bibbings work has been featured at the Financial Times, Bloomberg , MSN, Yahoo, The Wall Street Journal’s Market Watch, Forex Journal, FX Street, FinAlternatives, and many other highly acclaimed investment publications.
The Opinions expressed are the opinions of the author. The opinions, the trading styles, trading information and trading programs are not endorsed by the NIBA, but are the individual opinions, styles, information and programs of the author.