JLN Options: CFTC Proposal Poses "Monumental" Challenge to FCMs

Feb 13, 2013

CFTC Proposal Poses “Monumental” Challenge to FCMs
By John Lothian

Changes to the way customer funds are held and accounted for by futures commission merchants (FCMs) were inevitable after the bankruptcies of MF Global and Peregrine Financial Group. But it is pressure from buy-side market participants and their allies in Congress who are pushing for regulatory changes that could change the face of the futures business.

At last week’s CFTC Roundtable, the fourth panel of the day titled “Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organization,” highlighted the challenges and potential consequences to the industry. CFTC plans call for FCMs to hold more “residual interest” capital to cover all customer margin calls to reduce customer-to-customer default risk.

Because the roundtable was under-reported by the big news services, we are bringing you this John Lothian News Special Report based on the CFTC’s video of the meeting. Watch the JLN video:

SCFTC Proposal Poses Monumental Challenge to FCMs

The deadline for public comment on the proposed rulemaking on Enhancing Protections Afforded Customers and Funds Deposited by Customers is February 15, 2013. Members of the public wishing to submit comments on the roundtable and proposed rulemaking may do so via:

  • Paper submission to Melissa Jurgens, Secretary, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581; or
  • Electronic submission by visiting http://comments.cftc.gov and following the instructions for submitting comments through the CFTC’s website.

All comments must be identified by RIN number: 3038-AD88. All submissions provided to the CFTC will be published on the Commission’s website, without review and without removal of personally identifying information.

New Restoring Customer Confidence Video

The eleventh video in our Restoring Customer Confidence series deals with daily reporting of customer funds. Each week we will post a new idea answering the question – how do you restore customer confidence and bring traders back?

Restoring Customer Confidence More ideas»
Daily Reports: Tell Us Where The Money Is

Daily Reports: Tell Us Where The Money Is
MarketsWiki.tv

In the months and days since MF Global’s collapse and the Peregrine Financial Group’s fraud, some have argued simply for more transparency from futures commission merchants (FCMs). Scott Gordon, chairman and CEO of Rosenthal Collins Group, said his firm publicly discloses how customer funds are being invested and held by the firm. In Rosenthal Collins’ case, the firm reports its cash deposits held at US banks, funds held in US Treasury securities, as well as its how much is being held by clearing houses and clearing brokers and US banks. This type of transparency could be the difference in building customer trust or losing it.

Watch the video »

This video is sponsored by:
Fidessa

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About the Restoring Customer Confidence video series
In the aftermath of the MF Global collapse, fraud at Peregrine Financial Group and high profile high-frequency trading shocks, John Lothian News asks – how do you restore customer confidence and bring traders back? Previous videos:

Visit the video series page on MarketsWiki.tv over the next several weeks for new ideas and solutions.

Lead Stories

Low VIX, high correlations show investors are still banking on the Fed: Colas
Tom Bemis, MarketWatch
Nicholas Colas, chief market strategies at Convergex, says investors expecting a shift in correlations
as a result of January’s market surge and fund inflows have been disappointed.
http://jlne.ws/WmutGs

The VIX Term Structure Has Farther to Fall
The Options Insider
As tail risks have fallen aside and markets have normalized over the last several years, most of the strange market phenomena from the financial crisis have reversed themselves.
http://jlne.ws/Wmvxdk

FX: Happy Days Are Here Again
Gregg Wirth, Traders Magazine
Across the globe, foreign exchange desks are partying like it’s…well, any year but last year.
Traders talk of daily volume increases of 50 percent over this time last year at some institutional desks, and at least double-digit percentage gains being enjoyed by all. “They are saying there hasn’t been a month like this in years!” said Jeremy Boulton, an analyst for Reuters FX Buzz.
http://jlne.ws/11GzLSR

Hedge Fund Investors Are Sure Losers in Herbalife Fight
Steven N. Kaplan, Bloomberg
As Bill Ackman, Dan Loeb and Carl Icahn do battle over Herbalife Ltd., it is impossible to predict which hedge-fund manager has bet correctly and will “win.”
I do know exactly who the losers will be: hedge-fund investors as a group.
http://jlne.ws/11GAIL3

Analysis: ICE faces tough competition in iron ore swaps launch
Silvia Antonioli and Manolo Serapio Jr, Reuters (via Chicago Tribune)
IntercontinentalExchange Inc may struggle to wrest much business from Asian rival Singapore Exchange as U.S.-based ICE embarks on its latest push into the lucrative, 115-million-tonne market for iron ore swaps.
http://jlne.ws/11GDjoe

Lessons Learned from the VIX Options Pits
Adam Warner, Schaeffer’s Investment Research
So after writing about that call spread in the CBOE Market Volatility Index (VIX) on Friday, I had a short email exchange with a friend of mine who I will call “Lenny.” He’s a CBOE member and very familiar with VIX order flow.
http://jlne.ws/WmzLBO

The Ballad of VIX Market Makers, Continued
Adam Warner, Schaeffer’s Investment Research
So “Lenny” and I continued our conversation the other day in regards to the challenges of making markets in CBOE Market Volatility Index (VIX) options. I had noted in my post the disparity between the realized volatility in VIX itself versus the implied volatility (IV) in VIX options.
http://jlne.ws/11GEGDr

Exchanges

CME’s Gill Says Would Consider Joining Overseas Consolidation
Alan Goldstein, Bloomberg
CME Group Inc., the world’s largest futures market, would consider participating in an international consolidation of its industry, Chief Executive Officer Phupinder Gill said.
http://jlne.ws/11GAm79

CME Group doesn’t want to go private yet
Reuters (via Chicago Tribune)
CME Group’s chief executive on Tuesday shot down the possibility that the giant futures exchange operator will go private any time soon, a day after it was revealed that Nasdaq OMX Group had discussed such a move.
http://jlne.ws/11GBgjU

Nasdaq Steps Up Pursuit of A Partner
Jacob Bunge, Jenny Strasburg, Ryan Dezember, The Wall Street Journal
Nasdaq OMX Group Inc., long on the hunt for a partner, has ramped up its conversations about strategic options ranging from joint ventures to a sale, according to people familiar with the talks, as rival NYSE Euronext moves ahead with a merger that will form an even-bigger competitor.
http://jlne.ws/WmsXnF

Eurex admits first exchange member in Japan
Press Release (Automated Trader)
Eurex Exchange, the international derivatives marketplace, has announced that it has admitted its first directly connected trading participant in Japan – Nissan Century Securities Co., Ltd.
http://jlne.ws/11GCHyR

Bats applies to FSA to become recognised investment exchange
Press Release (FINextra)
Bats Trading Limited has made an application to the Financial Services Authority (FSA) to become a Recognised Investment Exchange (RIE) under section 287 of the Financial Services and Markets Act 2000.
http://jlne.ws/11GDYWw

CBOE, CFE, C2, and CBSX Trading Schedule For the Presidents’ Day Holiday
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) announced the following trading schedule for Chicago Board Options Exchange (CBOE), CBOE Futures Exchange (CFE), C2 Options Exchange (C2), and CBOE Stock Exchange (CBSX) in observance of the Presidents’ Day Holiday:
–  Friday, February 15: CBOE, CFE, C2, and CBSX will have regular trading hours for all products.
–  Monday, February 18: CBOE, CFE, C2 and CBSX will be closed.
http://jlne.ws/Wmw4vJ

Regulation

Global watchdog needs more time on derivatives rules
Huw Jones, Thomson Reuters
New rules on how much collateral is needed to back derivatives trades are unlikely to be finalized before September, leaving markets in limbo as global regulators seek to minimize potential harm to economic recovery.
http://jlne.ws/11GAW4L

Regulatory, competition pressures spell tough times for FCMs
Anish Puaar, The Trade
Large banks that act as futures commission merchants in the US could struggle to maintain profitability as a swathe of new regulations threaten to reduce the profitability of derivatives trading.
http://jlne.ws/WmvH4r

Technology

Where’s the Transparency in Order Routing? 
Ivy Schmerken, Advanced Trading
It’s good to have your order filled in a timely manner. In fact, the equities markets depend on fast and accurate executions. But with the proliferation of trading venues and the growing complexity of the equity trading markets, buy-side traders are looking for more information about how their orders got from point A to point B.
http://jlne.ws/Wmvhej

Strategy

Options Strategies For When Your Love For A Stock Fades
JJ Kinahan, Forbes
As we head into the “season of love,” many heads fill with visions of red roses, fine chocolates and romantic dinners.
All the while, options traders’ heads are also filled with the things that they love – that is, the feeling of amore that overwhelms them whenever the beauty of a defined-risk trade allows them to potentially make money and further define risk.
http://jlne.ws/11GzyyV

Revisiting the Good, the Bad, and the Ugly of VIX trading
Chad Karnes, ETF Guide
The VIX has provided us with some great trading profits over the past six months, but volatility linked exchange traded products remain a risky venture. We prefer using VIX options to hedge rather than hit-and-miss ETPs.
http://jlne.ws/WmuN81

What’s The Difference Between Forex Trading and Binary Options Trading?
FX Empire
The forex, or currency exchange, trading arena is consistently developing and advancing.
With an astronomic three trillion greenbacks traded daily in currency exchange, there’s plenty of room for new services to join the game. Binary opti

ons is the new boy on the block and judging by the quantity of binary options brokers, it’s here permanently.
http://jlne.ws/11GD64d

John Lothian Newsletter

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