We are now well past a year since MF Global‘s collapse seriously damaged the futures industry and now trekking toward six months since the Peregrine Financial Group went down in flames, taking more customer money with it.
Since November, after spending four months putting together solutions to those problems with our Restoring Customer Confidence video series, there’s been a small amount of industry action on what is arguably among the biggest threats to the futures industry’s growth – the lack of customer faith in the marketplace.
It’s been the era of the four “L’s” – low volume, low volatility, low interest rates and lots of regulation. That combination has been hit by the other L – lack of customer faith in these markets. What is sad and frustrating about the issue is that so little of it is talked about. Just one panel at the FIA Expo was devoted to it – “Moving Toward a New Customer Protection Regime.” And just days before the conference, NFA and AlphaMetrix announced a deal that will allow AlphaMetrix to provide the electronic confirmation system for the CME and NFA. A good start but since then, not much to discuss.There’s been very little mentioned about other solutions such as bankruptcy reform (too difficult) or a futures insurance system (too expensive) or more transparency (too cumbersome). And still no one has been brought to justice for the MF Global debacle. I guess the magic words “I never intended” to steal customer funds is a real and effective defense. Russ Wasendorf Sr. is getting what is deserved.
All in all, its too bad.
For an industry that has watched volumes plummet in recent years, there has been a serious lack of a coordinated effort by the industry to get this fixed and bring customers back. CME created a customer fund for farmers and ranchers but brokers often scoff at the idea as way too little and way too late.
Where that leaves the industry a year later is really right where it was as it lamented what to do about MF Global at the end of 2011. Now heading into 2013 and the story hasn’t changed. And that is the shame of the industry’s right now. Without some kind of coordinated effort, there is no way to restore customer confidence except with catch-phrases such as “We’ve been around for a long time, that won’t happen here” or “we would never dip into customer funds.” Those are pretty empty promises these days and a pathetic rebuilding plan.
It is easy to sit back to crow about what’s wrong with any industry. But the conversation needs to take place more publicly. Solutions need to be hashed out in a coordinated way. So where do we begin, again?
My three-point plan is simple.
- Push the trade confirmation system forward – loud and clearly with the NFA and CME. Invite independent research and auditing to prove it is what it says it is. Such a move will go a long way toward proving that there is a third-party watching, and confirming customer segregated accounts.
- Unite the brokerage, prop/CTA/hedge fund and institutional businesses along with the CME and the newer bigger ICE to promote the virtues of futures. Like many financial instruments out there, it lacks traditional understanding both in the US and outside the US.
- Finally, bring together the industry to create and promote a sustainable education platform that will serve the industry for the next 100 years. If you look at the options space, every US options exchange pitches in for the Options Industry Council’s education efforts. That block-by-block educational effort celebrated its 20th anniversary last year and is a key part of why options have grown into a mainstream instrument for retail and institutions. An international futures industry council could go a long way to making sure that regulators, retail and institutional players understand how these tools can be used.
Right now, the futures industry ecosystem is broken. Many of the little fish (retail) are no longer in the pond for the bigger fish (professional) and biggest fish (institutional). Without all the players in the pond, this ecosystem will not flourish and will not regrow.
The question now is who will lead this effort. Who will bring those players together to address this problem before even more damage is done. Futures still has an important and valuable story to tell. It’s history is ready to be reshaped and improved. Our Restoring Customer Confidence series is designed to keep this conversation going and generate real solutions. The question STILL facing this industry is: Who will step forward and lead this industry in 2013 and beyond?