The futures industry is ever evolving and in case you haven't noticed there are fewer and fewer FCMs interested in taking on new GIB business. A myriad of items and issues are responsible for the change in appetite the FCM has for GIB business. In particular the increase in regulatory oversight and concern for exposure to fines and other sanctions have resulted in the FCM community stepping up their review process for new IB applicants as well as retention process for existing guaranteed IBs.
The FCM business has not been the most profitable in the recent past as the economy struggled and interest rates have been stagnant, which historically was a major source of revenue within the FCM community. The largest issue for the FCMs in taking on new (or keeping smaller existing) GIB relationships is the risk, which comes in many forms these days such as regulatory risk, market risk, internal risk, etc. The risk reward model for this type of business has become skewed as of late and especially with the very real possibility of regulatory action and the possibility of getting slapped with "a failure to supervise” penalty or fine from the action(s) of the GIB.
Compliance specialists are in great demand right now and Compliance Departments are busier than ever with audits and ongoing reviews of IB's. They are also overwhelmed with all the new regulations and rules that have been implemented by the NFA and CFTC. If you are a GIB in this environment you should probably expect an increase in oversight of your operations, performance and profitability by your FCM.
The question then becomes; what should the GIB do to maintain a good partnership with the FCM and how can the GIB provide the FCM with an ongoing level of comfort and assurance the firm is worth the risk of carrying on the FCM books?
The FCMs perspective when it comes to GIB operations is that much of the day to day responsibilities should fall on the local office. They believe that it’s the IB's job to know each and every one of their client(s), manage trading risk, collect the funds for margin and/or debits in a timely fashion and keep the FCM informed of any potential and/or actual regulatory or client issues that may arise. For these reasons (among others) having good and consistent communication with your FCM contacts is more important then ever.
ADM and R.J. O’Brien are among two of the largest FCMs in the industry and between the two firms represent the majority of GIBs registered today. We were able to sit down with the heads of the IB departments from each respective firm to give you an insider perspective on what’s important for a GIB in this business environment.
It is important to remember that an FCM's interests are aligned with those of their IB's. Although we play different roles, ultimately both an IB and their clearing firm are in the commission based transaction business together. FCM's depend on their IB's to bring customers and trading activities to them for execution and clearing. When the IB grows and succeeds the FCM does as well.
The more you help your FCM understand the unique profile of your business - the specific challenges and opportunities you face - the more your FCM can deploy their extensive resources to support you. Do you need more trading ideas? The FCM's research analysts can work with you to generate trading opportunities that will interest your customers. Are you wondering about the best way to develop your business in the future? Speak with the IB team at your FCM about the kinds of business strategies they have seen generate success. Your FCM wants you to succeed. The more closely you work with them, the more they will be able to help you do so.
You and your FCM are also in the risk management business together. Be a great communicator with your FCM. The more they understand how you manage risk, the more confidence they will have in you. Be open with your FCM and work with them to prevent problems that can range from difficult to devastating, Remember, your interests are aligned when it comes to risk just as much as when it comes to opportunities.
View your FCM as your partner who is walking into the future with you. Help them understand you and your business. The more you can develop a mutually respectful and open relationship with them, the more you will both succeed.
For me, a good communication flow between the FCM and IB is the most important aspect of the relationship. Here are some examples on how to maintain an open dialogue with your FCM.
- Please respond to your FCM. If someone leaves you a message, please call them back, whether it be Compliance, Margins, or someone you’ve never heard of! Unfortunately, when you don’t reply to areas such as compliance or margins, it raises a red flag. The message back is that you are avoiding them and they begin to wonder why. Has the office moved and we weren’t notified? How are their clients getting through to them? Did something happen to the IB, such as an illness or accident? We’re all on the same team and need to work together.
- Don’t be afraid to ask questions. As your FCM, we are sending out more Compliance updates and notices than we ever have in the past, but if you don’t understand what is being delivered or if you have specific questions as to how this will impact your business, please do not be afraid to reach out and discuss these with us. Your opinion may be the same as other IBs, but if we do not hear from you we will never know how to help you address these issues.
- Let us know how we’re doing from time to time. Try not to let an issue fester, chances are we can come to an agreeable solution to an issue. Also, if some staff member goes above and beyond for you, it’s nice to let their managers know. Everyone loves a compliment.
- Remember that communication is a two way street!
As you can see Communication is a very important part of this relationship and must be better than ever in today’s environment. Please feel free to contact us with any questions or concerns.
