Dear CTA/CPO NFA Member –
Two of the CTA/CPO Board Seats are contested this year, your vote is critical, and we would appreciate your consideration.
We’ve served on the NFA Board for the past 4 years, running in and winning contested elections in 2012. The decision to run was driven by our disappointment with NFA’s response to the bankruptcy of MF Global, and our belief that a fresh perspective was needed to move the organization forward. Each of us has experienced over 25 years of growth and evolution in the futures industry, and we bring a small business entrepreneurial spirit to a Board that is for the most part dominated by large Wall Street firms who do not share our view on quite a few issues. Often in the minority, we have been strong, polite and persistent advocates, and have good working relationships with the other Board members and NFA Staff. Most importantly, we have had a significant impact on a Board culture that included very short meetings and limited discussion of important issues when we joined. We’ve set out below a few of the areas that we’ve focused on.
Regulatory burden. As the cost, time and resources required for compliance have increased, particularly in the wake of Dodd-Frank, we’ve done everything we can to reduce the overhead, with specific concern for smaller firms. As part of this we’ve advocated making it easier to offer liquid alt products, such as 40 ACT funds, on a level playing field with traditional mutual funds, with minimal or no overlap in SEC v CFTC/NFA jurisdiction.
Without admitting or denying guilt. Too often we hear this is the outcome, along with a fine, as the regulatory response to what appears to be significant criminal or civil fraud, with no actual consequences to the firm and individuals involved. We follow the cases brought by NFA as well as the CFTC, SEC and Justice Department, and are concerned that there is a disparity in the fairness of the justice that is meted out depending on the size of the firm involved. This is related both to the additional overhead required to go after large firms and their employees, as well as concerns that fully prosecuting some large firms and their employees presents systemic risks. From our perspective, the large Wall Street banks have well documented ‘cultural problems’ that are a significant factor in the misconduct of their employees, and we reject ‘too big to fail and prosecute’ as making the problem worse by creating the potential for more misconduct. Firms and individuals should suffer the full civil and criminal consequences of their misconduct regardless of size.
As a result of our efforts, NFA’s risk model includes increased scrutiny of member firms as a consequence of misconduct that is not related to their futures activity. While NFA is not the primary regulator in many situations, it does have jurisdiction over firms and individuals that are members, and it can do more when the CFTC and SEC fall short, at a minimum by banning for
life from the futures industry individuals who are involved in committing serious frauds. Subject to the conclusion of an as yet unfinished CFTC investigation that has been going on for 4 years and subsequent CFTC enforcement action filed in June 2013, a possible example is Jon Corzine, rumored to be interested in starting a hedge fund. As a corollary, NFA can seek to extend its jurisdiction to include more individuals, for example by requiring that the employees of Swap Dealers become registered as APs.
Governance. – We were successful in increasing CTA/CPO representation on the Board from 4 to 5 seats in 2013 after Swap Dealers were added, and then with the recent reduction in the size of the Board were successful in limiting the loss of CTA/CPO seats to just one versus two for the largest categories of FCMs and Swap Dealers, thereby increasing our voting power.
Selection of Public Directors. – We spearheaded an effort to have the Public Directors, who will control 10 seats with the smaller Board and are often the swing votes, selected individually by secret ballot, which increases the likelihood of increased diversity among this critical sector of the Board.
Fraud Detection and Prevention. - In the wake of reforms implemented in response to NFA’s failure to detect the Peregrine fraud, we spearheaded an effort to require that all NFA Examiners also be Certified Fraud Examiners, which was approved and is close to 100% implemented, and as a corollary, that as a matter of NFA policy, one of the purposes of an examination is to detect and prevent fraud.
High Frequency Trading (HFT). – We have pushed for years, so far unsuccessfully, to have NFA take a look at HFT, in particular abuses like spoofing (placing orders to impact the direction of the market and pulling them before anybody can trade against them), which are harmful to the markets and in particular our members. However, times appear to be changing as the CFTC has just released proposed regulations under the heading ‘Regulation Automated Trading’ which includes recommended safeguards, protections and a registration requirement. We are in the process of studying the proposal, and in general are in favor of some regulation to prevent abuses as well the next ‘flash crash’.
Exchange for Physical (EFP). Though not something directly under NFA's jurisdiction, we fought last year to prevent the elimination of EFPs, and continue to work with the leadership at NFA and the Exchanges to see if there is a way to resurrect or reinvent EFPs, in particular for the cash FX markets, which would increase access, increase liquidity and bring more FX trades on exchange, all of which is in the interest of our members. As of the past couple of weeks there has been some progress in this area as the size for Block Trades has been significantly reduced by both CME and ICE to as low as 5 contracts, with the potential for a Prime Broker or FCM to offer execution based on the liquidity of the cash market and have trades end up in customer accounts as futures contracts through the normal give-up process. For more information please check the following links:
https://www.theice.com/publicdocs/futures_us/exchange_notices/Block_Trade_FAQ.pdf
Doug currently holds a Senior Strategist position with Welton Investment Partners. Prior to Welton Doug served as President of Northfield Trading LP, a Colorado based CTA he co-founded in 1989. Doug is an attorney with a JD from the University of Colorado, and his prior experience includes working as a public defender with significant trial experience, including handling homicide cases.
Ernest is President and CEO of Efficient Capital Management, a CPO located in Warrenville, IL. Prior to founding Efficient, Ernest was responsible for the managed futures department of Hull Equity Management. Before that he initially worked as a floor trader and then held senior management positions with Chicago Research and Trading Group. Ernest has a BA in History from the University of Oregon.
We would appreciate the opportunity to continue the work we’ve started as CTA/CPO Representatives.
Please feel free to contact us by phone or email if you’d like more information or to discuss anything.
Respectfully submitted,
