Archive for the ‘CFTC’ Category

A Modest Proposal For A Better Way For Regulators To Track U.S. Futures Customer Segregated Funds

January 30, 2012

John Lothian has created a website where he is asking for users/registrants to add ideas for ways that the U.S. futures industry can recover from the collapse of future commission merchant (FCM) MF Global following the disclosure that hundreds of millions, possibly as much as $1.2 billion, of Customer Segregated Funds is “missing” from MF Global’s bank accounts. Lothian’s Futures Crowd Site

For the uninitiated: Customer Seg Funds are funds are cash balances and collateral deposited at FCMs, or funds earned from trading, that are, by rule and by law, required to be kept separate from firm money, and are intended to be held for the exclusive benefit of FCMs’ clients. I do not share the opinion that the Seg Funds “missing” from MF Global are missing due to any accounting error or “mistake.” I believe that the Seg Funds were taken by someone or some multiple people at the failed FCM to cover firm shortfalls. If and when this proves to be true, someone or some multiple people could well face prison, but that may be years from now.

In the meantime, John Lothian is asking for interested parties to offer ideas on how the U.S. futures industry can move forward after the apparent “disappearance” of millions of dollars of client funds. One of the ideas that was proposed was that missing client money should be restored immediately. That Suggestion Is Here. The original post was this:

“The number one priority: make customers whole…The number one priority to restore customer confidence should be to make the customers whole. Agree or disagree? No specific mechanism for making them whole is suggested here.

I concur with this idea and added the following comment:

I completely agree that the top priority is to make customers whole. I have had this argument with others and I do not buy into the “Slippery Slope” argument. I do not buy into the notion, though, that CME should make all the customers whole. Why not ICE, OCC, MGE, KCBOT too?

The American taxpayers got stuck bailing out so-called TBTF financial institutions. Know what really is Too Big To Fail? The U.S. Futures Industry, that’s what.

For one-six-hundreth of the cost of those bailouts, American taxpayers can restore integrity to the market, and make whole famers, retail investors, locals, and yes, even (GASP) speculators. . That needs to happen.

It won’t happen without industry-led regulatory changes, though. I have a proposal that is germinating in my mind about what that can and should look like. I will be adding that in the next day or two.

FCMs that are also broker-dealers must file a Financial and Operational Combined Uniform Single Report (FOCUS report) with the SEC every month. Part of the FOCUS report required for broker-dealers that are also FCMs is the Supplement Report called “Statement of Segregation Requirements and Funds in Segregation For Customers Trading on U.S. Commodity Exchanges.” I took a look at this report last November. For broker-dealers, the SEC passes along the Statement of Segregated Funds to the CFTC from each broker-dealers FOCUS report. The CFTC reports on this each month when it releases “FCM Data” and I’ve talked about those CFTC releases several times in the past: November, 2011 and June, 2011 and February, 2011 and January, 2011, for example.

FCMs that are not also broker-dealers must complete the exact same report – called the CFTC 1FR-FCM report – and submit it to the CFTC every month. The FCM 1-FR reports are incorporated into the CFTC FCM Data reports along with the FOCUS reports for broker-dealers.

As we see from the Statement of Segregation reports, whether from FOCUS (broker-dealer) or 1-FR (FCM), the FCMs track all required aspects of Customer Seg money on a regular basis. Each FCM must put this information together, at the very least, once per month. Some, it seems likely, do so daily as a normal part of their daily client processing. Those that do not calculate these figures daily certainly should. But none of them report the information, daily, in any meaningful way.

They should. Here’s how: today, every day, during an FCM’s night processing cycle, they calculate CFTC Large Trader position reports and create a print-image file (which gets archived in their data warehouse, whether it is Laser Vault, Speedscan, whatever). At the same time, the FCM creates an 80-byte Large Trader disk file which is delivered to the CFTC electronically, typically via FTP. The CFTC uses this information to track economic data and create economic reports.

I’d propose that FCM back-office systems be modified to do the same thing, for Customer Segregated Funds, on a daily basis. The systems already generate print-image reports that FCMs and broker-dealers use to complete their 1-FRs or FOCUS reports. These reports simply aggregate back-office system data at user-defined levels and create print-image reports (which are archived in data warehouses). The aggregation can be done monthly for regulatory reporting to SEC and/or CFTC – that’s already proven, FCMs do that regularly, so systems and functionality already exists for that. What does not exist today – what should be added – is creation of electronic files which can be delivered to regulators daily and used to track Customer Seg Funds, not just at the firm (FCM) level, but at the individual account level. (That’s what the back-office reports already do today, they generate detail reports at the customer level and also at the firm level. An FCM reports the firm-level, and archives the backing detail reports.)

The following fields need to be tracked, daily, for each FCM, for each customer account, and delivered electronically to CFTC, SEC, or some other outside entity that can use the data to track for anomalies, discrepancy, or other issues. If FCMs know that customer segregated funds are being tracked and analysed and reviewed daily, they’d be much more likely to preserve those funds when the FCM is in duress. And the data included in these new data files would likely make it much easier, in the event of an FCM failure, to move funds and positions to other FCMs in good standing, since they’d have ready access to the information.

1. Net Ledger Balance for each FCM client account.
1a. Cash
1b. Market Value of Securities

2. Net Unrelized P&L on futures positions (Open Trade Equity)

3. Option Value
3a. Add value of LONG options
3b. Subtract value of SHORT options

4. Net Equity: add lines 1, 2 and 3

5. Accounts liquidating to the negative Seg balance
5a. gross amount
5b. less market value of securities in those debit-balance accounts.

6. Amount to be Segregated (add lines 4 plus 5)

The figures above are the “client side” or the amounts in the bookkeeping system for clients. The figures below are the “house side” or the amounts that MUST be available. These figures might not be – and often are not – in the back-office bookkeeping system. Lines 1 though 5 should be generated for each client account, every day. Line 6 is the total amount of client funds that must be segregated. The lines below should also be tracked daily – and this might require changes to operational procedures at an FCM.

7. Amount deposited in Segregated Bank Accounts
7a. Cash
7b. Market value of securities posted by clients
7c. Market value of securities purchased with client money

8. Margin amount posted at regulated clearinghouses (DCOs)
9. Net Settlement (pay/collect) due to/from regulated clearinghouses (DCOs)

10. Option values cleared by FCM
10a. Add LONG option value
10b. Subtract SHORT option value

11. Amounts held at other FCMs for the clients of the FCM
11a. Net liquidating equity
11b. MArket value of securities purchased with customer funds
11c. FCM client securities pledged to the other FCM

12. Segregated funds in hand (petty cash)

13. Total (add lines 7 – 12)
14. Amount actually in Segregation (line 13 less line 6)

NOTE: I am closing the comment thread here (once I figure out how I figured out how) so the discussion can be encapsulated in one place. The place to discuss this topic is at John Lothian’s Futures Crowd website, in the Idea Thread for this topic. The link to that comment thread is here.

CFTC Rule to Require DCOs to Report Member Firm Client Positions Daily

January 30, 2012

Just some resources as I investigate this rule change and the impact to back-offices from which the reports must be made.

DCOs are derivative clearing organizations, aka clearinghouses.
FCMs are futures commission merchants, aka DCO clearing member firms.
FIA is Futures Industry Association, a futures industry trade group of which Needham Consulting is a member.

FIA has created a small committee of interested parties from DCOs, FCMs and industry consultants to review these rules and determine the best way for DCOs and FCMs to meet the new requirements. I am privileged to be a member of that committee.

CFTC Rule from the Federal Register: Federal Register

Text:

(1) Gross margin for customer accounts.

Proposed Sec. 39.13(g)(8)(i) would require a DCO to collect

initial margin on a gross basis for each clearing member’s customer

account equal to the sum of the initial margin amounts that would be

required by the DCO for each individual customer within that account if

each individual customer were a clearing member. A DCO would not be

permitted to net positions of different customers against one another,

but it could collect initial margin for its clearing members’ house

accounts on a net basis.

The Commission recognizes that gross margining of customer accounts

would be a change from current margin practices at certain DCOs.

However, the Commission believes that gross margining of customer

accounts would more appropriately address the risks posed to a DCO by

its clearing members’ customers than margining all of a particular

clearing member’s customer accounts on a net basis. Gross margining

would increase the financial resources available to a DCO in the event

of a customer default. Moreover, with respect to cleared swaps, the

requirement for gross margining of customers’ portfolios supports the

requirement in proposed Sec. 39.13(g)(2)(iii) that a DCO would have to

margin each swap portfolio at a minimum 99% confidence level.

The Commission recently proposed a new Sec. 39.19(c)(1)(iv) under

which a DCO would be required, on a daily basis, to report the end-of-

day positions for each clearing member, by origin.\43\ In connection

with the proposed Sec. 39.13(g)(8)(i) requirement for DCOs to collect

initial margin for customer accounts on a gross basis, the Commission

is proposing to amend proposed Sec. 39.19(c)(1)(iv) to additionally

require a DCO, for the customer origin, to report the gross positions

of each beneficial owner.

Catching Up: CFTC FCM Data in a Post-MF Global World

January 16, 2012

It has been a few months since I took a look at the CFTC FCM Data reports, which list FCM Customer Segregated Funds, Customer Secured Funds (also called 30.7 funds), and other data. As most readers will already know, MF Global flamed out spectacularly at the end of October, and with that collapse it was revealed that somewhere between $600 million and $1.2 billion of Customer Seg money is “missing” from the FCM. The hunt for that money, and the hunt for the perpetrators of this fraud and theft, continues to this day.

(If you don’t know about MF Global’s bankruptcy and scandal, this probably isn’t the blog, much less the blog post, for you.)

As MF Global was falling apart, the customer accounts and what remained of the customer money was divided up among FCMs in good-standing with clearinghouses (mainly CME) and regulators. I was told anecdotally that CME ordered the division of client business among multiple FCMs in a somewhat arbitrary way. For example, some of MF Global’s energy clients were assigned to FCMs that were not terribly active in the energy markets; additionally, MF Global “local” business (individual trader accounts) had to be divided up among the diminishing number of FCMs that continue to clear that business.

In the weeks and months that followed MF Global’s demise, some of the business that was (as I was told) somewhat arbitrarily assigned to FCMs had the opportunity to move to other FCMs in a more orderly manner than in those hectic weeks following the bankruptcy filing. Now that the dust is starting to settle a little bit, it seems like a good time to take a look at the CFTC FCM data in a post-MF Global world.

The source for the CFTC data is here.

The Starting Point

The last known “good” date for FCM data that included MF Global was August, 2011. The September report, which presumably would have included the failed FCM, has MF Global conspicuously missing. So, let’s take a look at August’s report.

fcmdataAugust2011 Sorted By Seg

In August, 2011 the top FCM measured by Customer Seg was Goldman Sachs, at $23.166 billion; second was Newedge at $22.348 billion. JP Morgan, Deutsche and Citi rounded out the top 5.

The next five FCMs were Merrill Lynch, UBS, MF Global, Barclays, and CSFB (USA).

MF Global, at 8th largest FCM in terms of Customer Seg, reported $7.270 billion. As such, MF Global reported 4.27% of all the Customer Seg funds in August, 2011. In contrast, the top 2 FCMs each had more than 13% of all Seg funds, and had nearly 27% among them. The top 5 FCMs comprised 53% of all the Customer Seg Funds reported to CFTC in August, 2011. The total Customer Seg funds reported for August, including MF Global, was $170,185,554,883.

The Most Recent Month

FCM Data Sorted By Seg Nov2011

The most recent month for which CFTC FCM data is available is November, 2011. As stated above, MF Global’s figures were mysteriously omitted from the September, 2011 report, and of course, by the October reporting date, the FCM has collapsed into bankruptcy. In November, Goldman Sachs again topped the list, with $22.299 billion in Customer Seg. JP Morgan was second with $17.597 billion and Newedge had slipped to third, with $17.447 billion. Deutsche and Citi rounded out the top five again.

With MF Global now gone, the next five FCMs are UBS, Merrill Lynch, Barclays, CSFB (USA) and Morgan Stanley.

Total FCM-reported Customer Seg Funds stood at $149,071,676,345, down more than $20 billion from the days before as much as $1.2 billion of customer money vanished from MF Global. I don’t know if that figure is somehow seasonal, but a drop of $20 billion in Customer Seg funds over three months is astonishing to me.

With the top five-or-so FCMs remaining relatively constant in terms of Customer Seg, and a drop of $20 billion overall, the percentages also provide some insight. Goldman now holds almost 15% of Customer Seg Funds (14.95889%). JP Morgan and Newedge are both at almost 12%. The top 5 FCMs hold more than 55% of all Customer Seg funds as of the November reporting period.

I’d be interested to hear what you all think of the numbers-crunching provided here. Do any of these stats/statements stand out to you, as surprising or as expected? Please let me know your thoughts.

SEC FOCUS Report Link

November 30, 2011

I get asked a fair amount these days questions about Customer Segregation rules, especially in MF Globals demise, and the apparently missing customer funds from what are supposed to be sacrosanct Segregated accounts.

When asked, I often have to go looking for the documents themselves, the actual forms.

I’m adding this post, with a link to those rules and forms, mainly for my own future use. But you all can use them too, dear readers. Yes, both of you.

You’re welcome!

Here is the link:

Click here.

http://ftp.sec.gov/rules/other/nasdaqllcf1a4_5/g_secform.pdf

CFTC Releases FCM Data for June, 2011

August 11, 2011

Today the CFTC released FCM data for June 2011. I sorted the data by Customer Segregated Funds and uploaded that sorted data here: Sorted Data.

As I’ve mentioned before, Customer Segregated Funds is a uniquely U.S.-centric measurement of FCM ‘size’ but I think it is often useful to look at the data this way. It is, after all, the only regulator-required measurement readily available.

A few observations:

First, Newedge leads the pack, again, when looking strictly at Customer Seg Fund. Newedge has a little less that $2 billion more Customer Seg than the Number Two on the list, Goldman Sachs. Newedge has $21.6 billion in Customer Seg; Goldman has $19.6.

It is interesting to me to note that the top 5 brokers (Newedge, Goldman, Deutsche Bank, J.P. Morgan Securities, and Citigroup) collectively have more than 52% of all the Customer Seg Funds reported to CFTC.

Merrill Lynch, UBS, MF Global, Barclays Capital and Credit Suisse round out the top 10 on the list. Along with the top 5 above, these 10 brokers comprise more than 76% of the Customer Seg Funds reported.

Add in the next 5 brokers from the list – Morgan Stanley, ADM, R.J. O’Brien, Prudential Bache, and Merrill Lynch Professional Clearing – and the top 15 names have more than 86% of the Customer Seg Funds reported.

Rounding out the top 20 – ABN Amro Chicago Clearing, RBS Securities, Rosenthal Collins Group, BNP Paribas, FC Stone – and more than 91% of Customer Seg Funds are held at the top 20 brokers on the list.

Also notable: while there are 123 names on the list, only 77 FCMs reported any Customer Seg Funds at all, as of June 30. But of those 77 names, 91% of the Customer Seg funds are held at just 20 FCMs.

Like before, McVean Trading in Memphis is the largest FCM to report Customer Seg Funds ($838 million) that also has no Foreign Secured Funds (aka 30.7 Funds) to report. Morgan Stanley Smith Barney LLC is the largest FCM reporting Customer Seg Funds ($562 million) whose Foreign Secured Funds ($1.9 billion) exceed the Customer Seg.

These are a few of the observations I made when looking over the list. When you look at the list, what tidbit of information leap off the page at you? If anything intrigues you, post it in the comments.

CFTC Proposed Rules: Capital Requirements of Swap Dealers and Major Swap Participants

June 6, 2011

Last Thursday CFTC added to the Federal Register proposed rules for OTC-cleared swaps (as in: cleared by Designated Clearing Organizations (DCOs), like CME and ICE-Trust). This is a long read, but is useful for at least one reason. The link below (pdf) includes a sample Statement of Cleared Swaps Customer Segregation Requirements and Funds in Cleared Swaps Customer Accounts under 4D(f) of the Commodity Exchange Act.

Link is here (pdf). See the very bottom, last page.

This is the 1FR report that Derivatives Clearing Members (DCMs) (or FCMs) must produce. Some DCMs and DCOs call the cleared-swaps funds “Sequestered” to differentiate them from Customer Seg Requirements for regulated futures contracts.

This link will be useful to compliance and regulatory staff at DCMs and FCMs that are, or intend to, clear OTC swaps on CFTC-regulated clearinghouses.

John P. Needham
June 6, 2011

CFTC Releases New FCM Data for February, 2011

April 12, 2011

Usually this shows up in my Inbox but today I got word from industry colleague Mike Wilkins via Twitter that CFTC had released the new FCM Customer Seg Fund and Customer Secured Funds. I’m still looking at this in my Inbox but for now, let’s look at the data.

Here is the report in PDF form sorted alphabetically. The data is as-of February 28th, with a reporting date of March 31, published by CFTC on April 11.

As usual, I like to take the CFTC report in Excel format and sort it by Customer Seg Funds. fcmdata0311 Sorted By Seg. It is sometimes interesting to me to take a look at some points that literally leap off the page.

Example: in the top 25 of FCMs as measured by Customer Seg Funds is McVean Trading, weighing in at 23 on the list. Put another way, they are the 23rd largest FCM in the U.S. as measured by Customer Segregated Funds. Interestingly enough, their Customer 30.7 funds – sometimes called Secured Funds – is zero. McVean is the largest of the U.S.-based FCMs that focuses entirely on U.S. exchange trading. And large McVean is, with more than $800 million set aside for the benefit of their customers.

And look at Newedge at the top, and Goldman right behind, with $30 trillion ed. note: billion and $28 trillion ed. note: billion in Customer Seg PLUS Customer Secured set aside for the benefit of their customers. Newedge has more than $2.5 trillion ed. note: billion dollars more than Goldman in Customer Seg. Enormous for a non-Too Big To Fail entity who received no TARP money.

Nine out of the top ten – comprising (get this) more than $100 trillion ed. note: billion – all use the same back-office system to process their exchange-traded U.S. regulated futures, and thus their Customer Segregated Funds.

When the time comes that CFTC starts requiring FCMs to include Customer Sequestered Money (a CME term that is approaching critical mass in terms of industry-wide acceptance), I’ll be very eager to see where that business lands – specifically, which back-office system users adopt. I have some thoughts on that. Some might call those thoughts ‘strong opinions.’ I’ll save that for a future post, perhaps.

In the meantime, without editorial commentary, here is the same data sorted exclusively by Customer 30.7 (Secured) Funds. It will give you some idea which U.S.-based FCMs have large business lines focused on non-CFTC-regulated exchanges. fcmdata0311 Sorted By 30.7

When the time comes, when my work experience and/or interests lead me that way, I’ll start exploring the FCM Retail Forex Obligation column. For the moment, those figures are outside my area of expertise and interest.

Closing: I’d ask you, readers: what figures from the sorted spreadsheets intrigue you?

CFTC Releases January 2011 FCM Data

March 12, 2011

The Commodities Futures Trading Commission – CFTC to the well-initiated – today released Financial Data for FCMs for January, 2011. You can click the link above to get the CFTC data.

I download this report every month when CFTC issues it. I sort the spreadsheet version released by CFTC, choosing to sort by Customer Segregated Funds. This is a uniquely U.S.-centric metric, to be sure, but it is a clear measurement of FCM size.

You can download my sorted version here: fcmdata2011-01 Sorted By Seg

UPDATE: For non-U.S. readers: here is the same data sorted by ‘Secured’ funds, aka 30.7 funds: fcmdata2011-01 Sorted By 30.7

HINT: by either measurement, Newedge wins.