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Regulators: Many in the industry regard policies and procedures proposed by the CFTC as a threat to Introducing Broker businesses. Read a selection of comments.

Wednesday, June 29, 2011

Industry Members Critical of Proposed FCM and IB Rules

To implement a provision of the Dodd-Frank Act passed by Congress last year, the Commodity Futures Trading Commission proposed new conflict of interest policies and procedures for Futures Commission Merchants and Introducing Brokers.

The new rules resemble those for analysts working at investment banks and include (but are not limited to) the following:
- Non-research personnel shall not influence the content of a research report of the futures commission merchant or the introducing broker.
- No research analyst may be subject to the supervision or control of any employee of the futures commission merchant's or introducing broker's business trading or clearing unit, and no personnel engaged in trading or clearing activities may have any influence or control over the evaluation or compensation of a research analyst.
- Any written communication between non-research personnel and research personnel concerning the content of a research report must be made either through authorized legal or compliance personnel or in a transmission copied to such personnel.
- Any oral communication between non-research personnel and research personnel concerning the content of a research report must be documented and made either through authorized legal or compliance personnel acting as an intermediary or in a conversation conducted in the presence of such personnel.
- Non-research personnel may review a research report before its publication as necessary only to verify the factual accuracy of information in the research report, to provide for non-substantive editing, to format the layout or style of the research report

Many in the industry regard these proposed rules as a threat to the viability of FCM and IB businesses. There may be an adverse impact on their clients, including farmers who use futures for hedging purposes. Here is a selection of comments on this topic submitted to the CFTC from January 2011 through mid-June:

"Most introducing brokers (no matter the size of the office) are selling their advice and recommendations through opening comments, closing market summaries, daily or weekly newsletters and regularly published research reports. That's why customers use IBs and pay us per transaction rather than paying discount commissions. It would be almost impossible for us to separate research from trading. If legislation is put in place in line with this proposal, it would threaten our ability to function as an IB and would cripple our ability to communicate and work effectively with customers. Our clients would have no one to turn to for management of their risk."

Doug E Schultz
John Stewart & Associates, Inc

***

"NFA notes that the Commission's proposal, which is modeled after NASD Rule 27112 governing research reports involving investment banking services, includes a number of very specific prohibitions and requirements that may not be directly applicable to derivatives trading. NFA is concerned that the proposed rules may result in a number of unintended consequences

The Commission specifically requests comment on whether the proposed rule should include an exception for small firms. NFA believes it is imperative that the Commission include this exception; otherwise the requirements may effectively prohibit the business model of a number of firms that provide an important service to the industry. In particular, a number of NFA Member IBs provide research and issue reports on agricultural products to their clients, often for hedging purposes. In many of these small firms, there is no distinction between individuals who engage in sales and trading and those who participate in research activities."

Thomas W. Sexton
National Futures Association

***

"(T)the Exchange would like to see an extensive and realistic cost-benefit analysis completed of each regulation prior to adoption. These burdens will be significant to the industry and should be transparent to the public prior to adoption of final rules."

Layne G. Carlson
The Minneapolis Grain Exchange

***

"If legislation is put in place in line with this proposal, you would be passing a law that potentially could be putting well over a thousand introducing brokerage offices out of business, and leaving the farmer producers with no one to turn to for risk management. In a time when our government is pressing hard to create jobs and reduce debt, you would be adding to the unemployment rolls."

Scott W. Stewart
Stewart-Peterson Group

***

"IBs provide the public with the information necessary to make good decisions about market participation. Advice and recommendations are an essential part of that information. The advice given in IB offices is often based on research conducted by the IB's registered personnel themselves or gathered from information distributed from the floor …It would be next to impossible to separate the advice/research functions from the trading and supervision functions

Proposed Reg. 1.71 and its attendant recordkeeping requirements are financially burdensome, unnecessarily time-consuming and unrealistic in light of how IB offices actually work. Moreover, this proposal does nothing to protect the trading public, but it would actually prevent market participants from receiving the type of information they need and on a timely basis."

Melinda H. Schramm
National Introducing Brokers Association



 
This article was published in Opalesque Futures Intelligence.
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