Tom Kadlec is president of ADM Investor Services (ADMIS), the futures commission merchant (FCM) subsidiary of Decatur, IL-based Archer Daniels Midland Co (ADM). He spoke with JLN Editor-at-Large Doug Ashburn at ADMIS’ recent National Broker Meeting, an annual convention of networking, information sharing, and cutting-edge economic research presentations. Kadlec’s message to brokers is that of financial stability and growth in the wake of diminished customer confidence and regulatory uncertainty. Transparency and communication, he says, are the keys.
Q: How has ADMIS communicated its message of stability amid uncertainty? Is this particularly important because of the firm’s large presence in the agricultural space?
A: We go back to our fundamental roots. The first is that ADM has been a member of the Chicago Board of Trade since the early 1920s. ADM is not only our parent company, but also our largest customer. They are a user of these markets, rather than a large OTC shop. They bring their hedging requirements to the exchange, and like the counterparty clearing model. Second, we have embraced the introducing broker (IB) model. We have a large core group of IBs many of whom are in the agricultural space, because of the ADM name. We also have a significant presence in other market sectors including managed futures, metals, energies and softs.
In 2008, we had a few large funds that said, “You have a lot of capital, we like the ADM name, you have a strong parent company, and you are not a bank.” This is not to say that being a bank is a negative, but the 2008-09 financial crisis was a challenging environment for banks, and it became more strategic for funds to have two or three diversified FCM relationships. Most customers have become more conscious of FCM risk in the last 14 months and we have been able to expand our customer base because we have good capital and a large corporate parent that provides real oversight and helps define how we do business.
Q: So your message is stability, and draws upon the firm’s history. How do you reconcile that with the fact that the markets are constantly changing?
A: Change has not come on a philosophical basis – we have always been a conservative company and we will always be a conservatively-run company. The change has been our realization that we must embrace technology even more. We offer a diverse group of technology products, and we use those tools to promote efficiency, to promote accuracy, and to promote communication with our customers. We have made several acquisitions over the years, that were more than just bolt-ons, but that fill in areas of need for us and expand our business in a strategic manner.
Q: We have seen a bit of turnover at ADMIS recently, mainly through retirement of long-term employees. How are you managing the change internally?
A: In a positive and transparent manner. I looked at where we are headed strategically and, as the floors continue to consolidate we have used the consolidation to offer employees new opportunities and strengthen our back office. We have successfully moved some floor personnel to our compliance, operations and IT groups which has increased our firm’s efficiency. Our head count is the same, but we have redeployed employees to areas where they can be of greater help to our brokers and our customers.
Q: While we are on the subject of change, we have seen several external changes, as well as other changes that are imminent, that have had, and will have, a tremendous effect on the market. How are you managing those changes?
A: The regulatory space is a concern. I am very supportive of rules surrounding customer segregation and the protection of segregated funds. I am very supportive of reasonable transparency that allows customers, exchanges and regulators to understand and confirm that assets are safe, and that they are not taking too much risk. There is a caution, from a pure pendulum standpoint, of going too far too soon. I think the best example of that has been the discussion of capital charges going from five days to three days. That is a 40 percent move. Compare that to, for example, your grocery bill going up 40 percent, or if the corn market were to go up 40 percent in a short time – that is a big move. So when I see the discussion from five days to three days, and ultimately, as some are saying, to one day, I have yet to see a reasonable timetable for the transition. We need to communicate that to our customers.
Another example is the talk about the requirement to tape all of our phone calls. How do you organize that? Which phone calls do you need to save? What about face-to-face conversations with customers? I am concerned about regulations that are so broadly written that you can interpret them several different ways. I would like regulators to think about the practical application of rules, and to look at them from the broker’s standpoint, and the FCM’s standpoint. I would really like more specified requirements.
Q: But, the other side of that argument would be the shift of the CFTC from a principles-based to a prescriptive agency, which some are complaining about with regard to Dodd-Frank.
A: The tighter the rules and the less interpretive they are, the better these rules can be in actually highlighting exactly what FCMs are supposed to do. I don’t want rules written for rules’ sake, or to be used to second-guess FCMs after the fact. An effective rule should be used to prevent problems from occurring.
These new rules could be subjective, and one way in which I would do that would be FCM profiling. This would provide customers with a transparent look into the way an FCM runs its operation. I support the futures industry adapting a securities rule, form ADV, which requires every broker-dealer to describe how they will do business. We could have a tight description, perhaps 15 categories, that would define the type of activities in which a firm is going to engage. If a firm stated that they are not going to trade on a proprietary basis, then they would not be allowed to trade proprietarily. If they want to become an investment bank, they would need to apply for permission to perform investment banking activities and disclose this to the public.
Customers have become more sophisticated and are more vigilant about understanding the business practices of their FCM because of MF Global and PFG. FCM profiling would allow them to put a risk value on every FCM, and decide the type of firm with whom they would like to associate. It would become part of the educational process, and customers would be able to make more well informed decisions as they choose a clearing firm.
Q: Regarding this shattering of customer confidence in the futures market, what would you say is one key takeaway from this entire episode?
A: Transparency. In the speech I gave at the ADMIS broker conference, I highlighted seven rules from the CFTC, exchanges and the NFA that increase the transparency we offer our customers. Personally, the most effective tool that I have, and use daily, is availability – answering my phone, giving out my direct line, and being there to talk to commercial firms, bankers and customers. In January and February of last year, I spent 40 percent of my time meeting with MF Global customers, and talking to them about ADM Investor Services. It was not to disparage MF Global – their bankruptcy happened and it was very unfortunate for the customers who were affected and the futures industry in general.
We talked about our process, why I have confidence in our firm, and what makes us unique. Our firm – and all of our business decisions – is built on the fundamental principles of integrity, financial stability and service. These customers want to trade futures and are critically important to our industry, but they need to know that their money is safe. Time does heal some wounds, but talking to and being up-front with the users of our markets is the key.