The Commodity Futures Trading Commission (CFTC) worries that consolidation among futures commission merchants (FCMs) signals the beginning of a slide down a slippery slope.
As reported in MarketVoice, the magazine of the global futures, options, and cleared swaps markets, CFTC Chairman Tim Massad expressed concern over the 10-year-decline in the number of FCMs. “It’s very important,” he said, “that we have a robust FCM industry. It’s very important that all customers, particularly smaller ones, are able to access the markets eﬀectively and eﬃciently.”
This decline adds to the burdens on the farming sector, according to CFTC Commissioner Christopher Giancarlo, at a time when farm income is falling dramatically. Kevin Piccoli, deputy director of the CFTC’s division of swap dealer and intermediary oversight, concurred, adding that between December 2005 and December 2014, the number of ﬁrms registered with the CFTC declined from 171 to 76 over that nine-year period and the number of ﬁrms with customer assets declined from 85 to 60.
What’s going on?
Piccoli attributed the decrease to a number of factors such as bankruptcies, mergers, internal reorganizations and changes in regulatory status. He noted that the bulk of the decline was among smaller FCMs serving commercial agricultural interests. During this nine-year period, a signiﬁcant number of smaller ﬁrms holding an average of $10 million in customer funds went out of business or combined with other ﬁrms, he said.
Eileen Flaherty, director of the CFTC’s swap dealer and intermediary oversight division, credited increased compliance costs for this decline — especially among smaller FCMs. That, and the low-interest rate environment, which acts as a deterrent for new ﬁrms entering the business.
The CFTC’s concern is that the impact of falling number of FCMs is expected to impact agricultural interests which rely on FCMs to facilitate their hedging programs. According to Bill May, president and chief executive officer of the American Cotton Shippers, his members increasingly are “concerned about the health of this sector and believe that, particularly with many swaps now being pushed through clearinghouses per the Dodd-Frank mandate, we arguably need more FCMs, not less.”
In the aftermath of MF Global and Peregrine Financial, the industry worries about risks to those who need to move their positions to other FCMs, and their ability to maintain business relationships with more than one FCM. “We operate with two FCMs,” said MJ Anderson, chairman of the risk management committee of the National Grain and Feed Association and director of risk management and merchandising for The Anderson Inc., an Ohio agribusiness. “Our view is we can’t aﬀord to walk in and not be able to service our customers.”
Scott Cordes, president of CHS Hedging, noted that compliance costs have been a burden on his ﬁrm. CHS, which is based in St. Paul, Minn., is a small FCM and risk management company owned by farmers, ranchers, and local cooperatives. “Our mission is to serve agriculture,” he said. “We’ve doubled our costs around headcount and compliance and we’re probably headed to triple. So we always ask ourselves, how do we continue to have the size and scale to compete?”
Speaking on behalf of the FIA, Tom Kadlec, president of ADM Investor Services, said the cost of regulatory compliance has doubled for FCMs over the past ﬁve years… In this new regulatory landscape, he reported that FCMs at times are reluctant to take on new customers from other ﬁrms. “If there’s one thing that we’ve learned in the last 10 years with the crisis, it’s that we have to really dig down and do proper due diligence.”
The consensus is that the cost of hedging agricultural risks will rise. “There’s nothing we see that’s going to be lowering costs,” said Lance Kotschwar, a senior compliance attorney at Gavilon Group, an agribusiness based in Omaha, NB. “It’s going to add cost and it’s going to put continued pressure on a number of FCMs. We don’t know exactly how, but it’s not going to be good for us,” he said.
Is it possible to pay too much?
Perhaps. Especially when there are systems and solutions that enable FCMs, RIAs, broker-dealers, and others to create a culture of compliance for — at the very least — their non-trading compliances requirements for as little as $10/user/month. But one must look at these third-party systems and do appropriate due diligence.
If you are charged with compliance, you know you’re facing increased oversight which requires you to juggle more paper, more files, more data. Regulatory compliance requirements are getting more all-consuming and complying can often times feel like an undertaking without end. If your compliance function is under pressure to do more with less, what are the options?