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  • Statement of Commissioner J. Christopher Giancarlo for the Market Risk Advisory Committee Meeting

    June 1, 2015

    Federal government policies are making America’s Futures Commission Merchants (FCMs) an endangered species. The most recent example is the storied commodities firm, Bache, founded in 1879, that is now being dismembered. A French bank is acquiring a portion of it, while thousands of its clients are being told to find new FCMs to serve their business needs.1

    While not a household term, “FCMs” are the futures markets equivalent of stock brokers providing critical services for businesses that need to hedge against business and production risks. Today, because of a combination of mismanagement by a few, U.S. monetary policy and over-regulation, FCMs are consolidating at an alarming rate with dire consequences for America’s farmers, ranchers and manufacturers. Tomorrow, the Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee (MRAC), under the sponsorship of Commissioner Sharon Bowen, will hold a hearing to discuss the plight of American FCMs.

    That hearing will undoubtedly recognize that there are far fewer FCMs than there used to be. The number of FCMs has dramatically fallen in the past 40 years: from over 400 in the late 1970s, to 154 before the 2008 financial crisis,2 and down to just 72 today.3 Of the 72 FCMs registered with the CFTC as of March 2015, 15 firms were dormant, leaving only 57 active firms serving customers.4 As the number of FCMs has dwindled, systemic risk has increased with the five largest firms accounting for more than 70 percent of the market.5 Meanwhile, customer assets held by all FCMs have grown from $169.5 billion in December 2007 to $245.7 billion in March 2015.6

    Industry consolidation derives from several factors. Fraud and mismanagement caused spectacular failures of firms like Refco, MF Global and Peregrine Financial. The prolonged U.S. monetary policy of near zero percent interest rates has eliminated a key source of income for FCMs through reinvestment of customer money.7

    Another threat to FCM survival comes from burdensome new regulations. The collapse of MF Global and Peregrine Financial prompted a series of new customer protection rules,8 some of which were undoubtedly needed. However, these new rules have impacted small FCMs more harshly than large ones. In addition, the CFTC’s new rules on ownership and control reporting greatly increased compliance and paperwork burdens for FCMs.9 The CFTC also further expanded FCM recordkeeping obligations to include the recording of all oral and written communications leading up to the execution of a transaction.10 The supplementary leverage ratio (SLR) rule issued last year by U.S. prudential regulators will make it more expensive for bank-owned FCMs to clear customer trades. That is because the SLR requires banks to hold more capital for every asset on their books, even margin held for clients on cleared trades of commodity futures, leading to diminished FCM income and increased client costs.

    FCMs as an industry are spending millions of dollars for infrastructure, technology and compliance personnel to implement these complex regulations. Smaller FCMs that traditionally serve agricultural and small manufacturing interests must devote precious resources to comply with cumbersome rules more easily handled by large bank-affiliated competitors. FCMs are also overwhelmed by significantly increased demands for information from self-regulatory organizations and the CFTC. One FCM told me that it receives around 9,000 regulatory requests per year!

    While many new rules contain plausible protections, regulators have lost sight of the increased costs for FCMs. Most of the rules have been imposed without a true analysis of the effect on FCMs and end-users.11 As a result, many small to medium-sized FCMs providing specialized services to everyday businesses are charging higher fees or leaving the industry because they cannot afford the additional infrastructure, technology and compliance costs imposed by the swelling regulations. Still, others have stopped clearing swaps for customers, which has the perverse effect of concentrating risk in fewer and fewer firms, a dangerous proposition in light of Dodd-Frank’s clearing mandate.

    The Dodd-Frank Act was ostensibly about reforming “Wall Street.” Yet, again, the increased costs and burdens that directly or indirectly flow from the law have negatively impacted Main Street and America’s farmers, ranchers and manufacturers who need the services of the remaining small and medium-sized FCMs. Rules born out of the law are forcing America’s farmers, ranchers and manufacturers to pay higher fees for less choice in FCM services. With fewer firms serving a bigger market, risk is being more concentrated in large bank-affiliated firms, increasing the systemic risk that Dodd-Frank promised to reduce. Undoubtedly, heightened systemic risk arising from FCM consolidation is appropriate for consideration and analysis by MRAC.

    If we are not careful, America’s rural producers will soon be left with few places to protect against business risk. The Midwest farmer who plants 1,000 acres of corn may have no choice but to go unhedged against market volatility. Sadly, it appears that the markets where “derivatives” were born are quickly losing their core service providers, possibly forever.

    1 Christian Berthelsen and Tatyana Shumsky, SocGen Deal for Bache Illustrates Commodity-Trading Woe, The Wall Street Journal, May 26, 2015, available at

    2 CFTC, Selected FCM Financial Data as of December 31, 2007, (last visited May 26, 2015) (excludes firms registered solely as retail foreign exchange dealers).

    3 CFTC, Selected FCM Financial Data as of March 31, 2015, (last visited May 26, 2015) (excludes firms registered solely as retail foreign exchange dealers).

    4 Id.

    5 Joe Rennison, Nomura Exits Swaps Clearing for US and European Customers, Financial Times, May 12, 2015, available at (based on amount of customer collateral required according to CFTC data).

    6 The March 2015 number includes $53.1 billion in cleared swaps customer assets that was not included in the December 2007 number. See supra note 2 and 3.

    7 17 C.F.R. 1.25.

    8 Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations, 78 FR 68506, 68510-12 (Nov. 14, 2013) (discussing recent customer protection initiatives).

    9 Ownership and Control Reports, Forms 102/102S, 40/40S, and 71, 78 FR 69178 (Nov. 18, 2013).

    10 17 C.F.R. 1.35. The rule applies to transactions in a commodity interest and related cash or forward transactions. Oral communications that lead solely to the execution of a related cash or forward transaction are excluded.

    11 7 U.S.C. 19(1), CEA 15(a). Given the CFTC’s lax cost-benefit consideration requirements.

    Last Updated: June 1, 2015