On Voluntary Subscriptions

January 9, 2013

I am a believer that folks should use whatever free resources available to them, both professionally and personally. Facebook, Twitter, LinkedIn, and Instagram are examples of services that are free for ordinary users/consumers, and I use all of them, for personal or professional purposes. (Sometimes I use one or more of them for both.) My usage for each of these services is based on their cost to me – nothing! If one or more of these services started to charge for the servies, then I’d make a value judgement on what the overall worth was, to me, and either pay or jettison the service, as my values dictated.

An example of this was the recent Chicago Tribune decision to switch from entirely-free content to limited free content, with a paywall behind which “premium content” was stored. This change came in November, 2012. For years before the switch I read the Trib online, paying nothing for all the content. When the premium content – mainly, opinion columnists, but also content from Trib partners publications like Forbes and The Economist, along with digital archives dating to the 1850s – was moved behind the paywall, I had to make a decision on whether to subscribe. (Ultimately I chose to subscribe. The Trib was and is, after all, my original hometown newspaper, and during the month I was considering whether to subscribe, I found I really missed a lot of the newly-minted “premium” content.)

The examples above – free applications/content, mandatory subscriptions – are two examples of how application providers and content providers deliver their apps and content to consumers. There is a third type, however, referred to sometimes as “voluntary subscriptions.”

One example of “voluntary subscriptions,” and one that I cite every once in a while when I’m talking about this topic, is science fiction author John Scalzi. Science fiction fans know Scalzi as the Hugo Award-nominated author of Old Man’s War, or maybe as the Campbell Award winner as best new Sci-Fi author in 2005. Scalzi also served as president of the Science Fiction and Fantasy Writers of America.

Not everyone knows, though, that Scalzi’s first two novels, including the Hugo-nominated Old Man’s War, were published under a voluntary-pay model on his website.

The real purpose of this post is to highlight another voluntary subscription content provider: the John Lothian Newsletter, and to encourage consumers of this daily newsletter to subscribe to the service.

We’re all familiar with the stats that Lothian publishes a couple times per year: MarketsWiki.com with 15.5 million views in 2012, more than 33 million views since it launched; MarketsReformWiki.com with 3 million page views since launching.

It is possible that many are not aware, though, that these wikis are funded entirely from the newsletter subscriptions (plus whatever sponsorship revenues the newsletter generates).

But there is more to the Lothian Newsletter than just the newsletter itself, and the associated wikis. There is also the Futures Crowd site launched after the collapse of MF Global, which solicited input from all over the capital markets industry on addressing concerns rising out of that firm’s failure (and to which I contributed); there is the Restoring Customer Confidence video series; there is the MarketsWiki.TV video series that covers a wide variety of captial markets industry-related topics, from the listing of new types of futures contracts to social media strategies for market participants.

The daily Lothian newsletter provides valuable, essential information to market participants at every level of the food chain, from traders to technologists, from front-office staff to back-office operations professionals, and especially for consultants like me. Put another way, if you don’t read the newsletter every day, then I’m smarter than you are, because I do read it every day.

This post is not some Public Television pledge drive, though, and it is not a paid advertisement either. I am a fan of the work that Lothian and his team do. I believe that this team is providing a genuinely valuable and vital service to the industry in which I work, and I believe that they deserve recognition, and that they deserve payment, for the terrific work they do.

So if you’re a participant, like I am, in the global capital market or futures industry, and you already subscribe to the newsletter, it is time to renew that subscription. Do that now. If you participate in the capital markets/futures industry and you don’t subscribe to the newsletter, you are doing yourself and your career a great disservice and you should fix that now by subscribing.

Yes, it is voluntary. But it is important, too, to all of us, to support the work that the team behind the Lothian Newsletter, and MarketWiki, MarketsReformWiki, the Restoring Customer Confidence video series and MarketsWiki.TV, are doing.


John P. Needham
January 4, 2012
11:05 AM
Aurora, IL

2012 in review

December 31, 2012

The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.

Here’s an excerpt:

600 people reached the top of Mt. Everest in 2012. This blog got about 3,500 views in 2012. If every person who reached the top of Mt. Everest viewed this blog, it would have taken 6 years to get that many views.

Click here to see the complete report.

Normandy Beach, NJ – Post Sandy #2

November 15, 2012

A friend I’ve never met (but will, someday, I swear) – Sal Arnuk – put together this little video. Vocals and guitar are from Sal. He also took the pictures from Normandy Beach. Notice that there is a boat in the parking lot of the big church with the green tile roof. Bailey Needham, our oldest son (12 years old in January) was baptized in that church in the summer of 2001.

Normandy Beach, NJ, After Hurricane Sandy

November 15, 2012

What a “sandy” hurricane it was, too.

As many readers know, my wife Carolyn’s family has had a shore house in Normandy Beach for many, many years. Normandy Beach was hit quite hard by hurricane Sandy. IT is on the barrier islands so access was extremely limited following the hurricane, and the ensuing nor’eater that blew through. Finally, yesterday, Carolyn’s sister in Philadelphia was able to visit Normandy Beach. She sent us some pictures.

The Hardy Shore House, as it is known, is in the first three images below. The rest of the pictures are of neighbors’ houses. These are all people that carolyn grew up with, or near. The pictures break one’s heart. Normandy Beach will probably never be the same. But the folks there will rebuild, will recover, will return. In the meantime, we’ll get to work on Carolyn’s family’s house, and we’ll be praying for the rest of the folks who suffered, far worse than we did.

As they say about Normandy Beach, and I know this, because it is on t-shirts and bumper stickers: “Once you get the sand between your toes, you ALWAYS come back to Normandy Beach.”

Again, The Hardy Shore House is in the first three images. Photo credits go to Mary Ann Dwyer of Philadelphia, PA and Avalon, NJ.

Shore House is the small one on the left.

Carolyn’s family’s house is the little one on the left in the next picture. Compared to the rest of Normandy Beach, we’re really very lucky.

Shore House is the small one on the left.

Now, here is what a lot of the rest of the town looks like:

CFTC FCM Data Report for September Released

November 13, 2012

Time for another look at the Customer Segregated Funds figures. CFTC compiled the data submitted by FCMs (1-FR reports) and from broker/dealer FOCUS reports. The data from September 30th, compiled by CFTC in the interim and published last week.

CFTC Report Page.

I take the CFTC report and sort it report by column J – customer segregated funds required. The sorted report is behind this link.

The top 5 comprise 53% of all Customer Seg Funds. All are FCM-Broker/Dealers.

JP Morgan Securities
Deutsche Bank Securities
UBS Securities

The top 5 above along with the next five comprise 77.3% of all Customer Seg Funds. Again, all are FCM-B/Ds. The second five are:

Merrill Lynch
Morgan Stanley
Credit Suisse Securities
Barclays Capital

The first FCM (non-B/D) is R.J. O’Brien, at 11th.

More later….

U.S. Futures Customers Pulled $10 Billion Out of the Futures Market

September 13, 2012

As many know, the CFTC publishes a list of U.S. futures commission merchants (FCMs) and the amount of customer money they have in their Segregated U.S. Funds bank balances. Today they published the list for month-end July, 2012, to their website.

The CFTC report comes from the FCM’s CFTC 1-FR reports, which are part of the SEC FOCUS report if the FCM is also a broker/dealer in U.S securities. If the FCM is not also a broker/dealer registered with the SEC, then they submit just the 1-FR to CFTC.

Here is the latest report from CFTC: Latest CFTC Report

Here is the same list, sorted by FCMs’ Customer Segregated Funds balances. fcmdata0712-sorted-by-Seg

There is a lot of interesting information and data in the report: RJ O’Brien is the largest FCM in the U.S. as measured by Customer Seg, that is not also an SEC-registered broker/dealer in U.S. securities, for example. Another example: 8 of the top 10 names on the list all use the same vendor back-office system. There are 69 FCMs that reported Customer Seg to SEC and/or CFTC. (There were 71 as-of last October, when MF Global turned on their money vaporizer; there were 70 until Peregrine went down.)

But that’s not the most interesting thing to me. To me, the most revealing thing about the current report is this: In June of 2011, 13 months ago, FCMs in the U.S. reported a cumulative $153,881,560,188.00 in Customer Segregated Funds. (I used the CFTC report from that date to generate this post, where the data was sorted: June 2011 Sorted Data.

Today’s report from CFTC shows a cumulative Customer Seg figure of $143,561,983,577.00.

That means that customers of U.S. FCMs have pulled $10,319,576,611 out of their FCMs in the past 13 months of CFTC reporting.

Even if one assumes that MF Global lost/stole/vaporized $1.6 billion and that Russ Wasendorf at Peregrine stole another $200 million, there is still a full $8 billion-plus that customers of FCMs took out, entirely on their own.

FCM customers have options: ETFs, mutual funds, stocks (with SIPC protection), etc. It looks like many are utilizing the options, and departing the futures industry.

FCM Data – May 31 Report from CFTC

July 13, 2012

By now most folks know that Peregrine Financial Group, variously called PFG or PFGBest, has gone belly up amid allegations of the theft of $220 million dollars of customer money. The company’s sole owner was found by employees parked behind the corporate HQ in Cedar Falls, IA with a hose running from his exhaust pipe to the passenger seats of his car. He has survived. There are reports of a suicide note that talks of “financial irregularities.”

Today the CFTC released the monthly FCM Data report of Customer Segregated Funds (and 30.7 Secured Funds). Peregrine is on the list, at #38, having reported $371,453,743 as the firm’s Seg Requirement, and reporting $376,523,865 as Customer Seg on hand. This means the firm reported a $5,070,122 excess in their Seg balances. It is interesting to note the PFG is on this list, when MF Global was removed from the list on the first report after their bankruptcy last October 31.

Of course, now we know that these reports, for Peregrine, were falsified. Reports are that they told regulators that the firm had some $220 million in a Segregated bank account, but regulators (NFA, the National Futures Association) have been told by the back that there was less than $10 million on hand.

According to the NFA’s Member Responsibility Action (MRA) this has been going on for at least two and a half years.

The CFTC releases the report sorted by FCM, alphabetically. I usually sort the data by Seg amounts. Here is a link to the CFTC FCM Data Report, sorted by Customer Segregated Funds Required (column J).

fcmdata0512-xls Sorted By Seg

My Dry Rub Recipe

May 26, 2012

Here is the recipe I use to dry rub. I generally add/change ingredients on a whim, but this is the base recipe. It is a variation on Emeril Lagasse’s “Emeril’s Essence.” I use this recipe on pretty much anything: beef, including steaks (sometimes), chicken, pork, fish and shellfish. It can also add an interesting color and flavor to cream-based sauces (like bechamel) and I always add it to canned baked beans when they are cooking.

8 T best quality sweet paprika (the brand in the red cans, see note below)
3 T cayenne
5 T fresh ground pepper
6 T ordinary (iodized) table salt
6 T garlic powder
3 T onion powder
3 T dried oregano
3 T dried thyme
2 to 4 T dutch process cocoa powder (optional, but recommended)

Note: the recipe uses 3 T cayenne so you can vary the heat quite a bit by swapping out some of the paprika with the same brand hot paprika, but use caution. The last time I made this dry rub I used 4 T each, sweet and hot, and it was sizzling hot and overwhelmed some dishes.

Make a batch, store in a glass jar (you can get them from Penzey’s Spices website, where I get most of my spices and dried herbs) and give it a try. If you do, please let me know what you think of it!

Bon Appetite!

A Tip of the Cap to CME Group

April 4, 2012

News broke today that CME Group would begin requiring clearing member firms to report every day their Customer Segregated Funds balances.

Details here, via John Lothian’s Newsletter.

This is great news, and is something that was advocated on this blog back in January.  The CME took it even further with the announcement that FCMs would be required to report twice-monthly on investments of Customer Seg Funds, which is a great idea too.

It isn’t everything I hoped it would be. There is no daily reportable file. Instead, reporting will be 1FR (FCM) and FOCUS (broker/dealer) based, and forms submitted or filled out on Windjammer. And there is no tracking of each customer account’s contribution to an FCMs Customer Seg balance.

But still, this is a great start.

Well done, CME. Well done indeed.

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.