To put it lightly, selecting a futures commission merchant (“FCM”) has become increasingly difficult during the last year. With the failure of MF Global (“MFG”), Peregrine Financial Group (“PFG”), and the missteps of Knight Capital Group fresh in our memories it’s no longer as simple as selecting a name off of a list. It doesn’t matter how low commission rates are, how good customer service is, or if you prefer a different order entry system. The only thing that matters is whether or not investor monies will be available for trading and your business will be around tomorrow. During these trying times what can an individual investor, commodity trading advisor (“CTA”), Introducing Broker (“IB”), or any other market participant do to try and protect themselves from the catastrophic loss of their FCM?
Over the last year I have had conversations with individual customers, professional brokers, regulators, politicians, attorneys, and other futures market participants about how to identify red flags at a clearing firm. From all of these discussions what I’ve gathered is that there is no sure fire way or consensus on how to guarantee your FCM won’t be next. However, before losing hope, there are a number of factors that are commonly agreed upon that could (and should!) be used as early indicators an FCM may be in a position of elevated risk.
The “Assessing FCM Risks” panel at the NIBA conference will be the perfect place for me to showcase what I’ve found for you. If you can’t make it don’t fret, I’ll also make this information available at the Turnkey Trading Partners website in the near future. To get us started, here are just a few of the areas you should consider when selecting an FCM and I’ll be talking about at the conference:
1. Previous Regulatory Violations, Legal Issues: It’s imperative to check with your FCM’s regulator for previous violations of their rules. It’s also necessary to run a general web search on your FCM to look for pending litigation and previous legal matters. When doing this be sure to recognize that nearly all FCM’s will have some sort of regulatory history so try to be reasonable. Violations related to the firm’s capital position, anti-money laundering practices, and supervisory functions to name just a few can be major red flags.
2. Try to Determine How the FCM Makes Money: Does your FCM try to make money on commissions? Proprietary Trading? Interest and Fees? Is your FCM only involved in the commodity futures market? Does the company exist to support some other business function for a larger subsidiary? Does it have outside revenue channels or liability exposure? Trying to determine how your firm makes money is critical to considering its long term viability.
3. Evaluate the Corporate and Accounting Structure: Asking for a copy of the company’s annual report, certified financial statements or auditor’s opinion may seem unorthodox but it’s completely reasonable. The larger your relationship with your FCM the more they should be willing to share this information with you. A culture of secrecy is not something you want at the firm you’re going to build a business around. The discovery of a qualified auditor opinion or a lack of diversity on the company board could be huge red flags.
I look forward to sharing more with you on this topic at the NIBA conference. Please stop by after our discussion on assessing FCM risk and introduce yourself. I’d love to hear how you have been handling the recent market turbulence and would be honored to meet you.
About the Author
James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in approximately 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations. Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements. He has also provided financial markets content for Financial Times, Bloomberg, MSN, Yahoo, FinAlternatives, The Wall Street Journal’s Market Watch, Forex Journal, FX Street, and many other highly acclaimed investment publications. James can be reached by calling (312) 324-0040 or via email at info@turnkeytradingpartners.com
