NIBA Journal

Insights, analysis, and updates from the National Introducing Brokers Association

October 27, 2011

In the Future IBs and Financial Advisors Compete Head to Head | Part 2

In our previous article, the benefits of managed futures mutual funds were discussed. This article tackles some of the major issues in establishing a mutual fund. Steps Necessary for Mutual Fund Formation and Registration From a legal standpoint, the “mutual fund” is a Securities Exchange Commission (“SEC”) registered and regulated pooled investment vehicle that is required to comply a complex set of rules, regulations and statutes, including the Investment Company Act 1940 (“1940 Act”). Mutual funds are often times referred to as open ended investment companies. While SEC registered mutual funds may be organized in almost every state within the United States, a key insight is that many legal practitioners view the state of Delaware as the jurisdiction of choice when it comes to establishing an investment company. Once established in a particular jurisdiction, the investment company is put through a rigorous registration process with the SEC. In this process,...

The Interview | Sequel to, "Grow Your Business" - Part 1

On September 12, 2011, it was my pleasure to give a presentation for the National Introducing Brokers Association, “Grow Your Business by Hiring the Right People.” The response to my program has been gratifying and quite positive. Most remarked on the clarity of the message, especially the relevance and impact of the case studies involving real people and business situations. I derived immense satisfaction from offering these remarks, which reflect my more than 25 years advising financial institutions on human resources practices. The interview process, for example, is fraught with psychological issues. It is important to remember that the interview is a two-sided meeting. As the employer you are interviewing the candidate to determine if the candidate is the right person for your company. The candidate, at the same time, is interviewing you to determine if this is the right company for them. I once refused a job offer because...

IBs find increased regulatory obligations with introduction of new rule amendments

Patricia Cushing Associate Director, Compliance, National Futures Association The recent amendments to NFA’s Compliance Rule 2-30 (often referred to as the “Know Your Customer” rule), the proposed changes to CFTC Regulations 4.5 and 4.13 and the increasing demands of supervising the use of social media are all contributing to an increase in an IB’s regulatory obligations. However, by making some enhancements to their policies and procedures, IB’s should be able to meet these obligations with little disruption to their operations. NFA Compliance Rule 2-30 One of the changes to NFA Compliance Rule 2-30 that became effective in January 2011 requires FCMs to contact their active customers, at least annually, to verify that the "Know Your Customer" information obtained from that customer remains materially accurate. For accounts that are introduced to the FCM through an IB, the responsibility to verify the information remains with the FCM. However, whenever the customer notifies...

Understanding Public Perceptions on the Market with Technical Analysis | Part 2

In the last issue, we covered why a sentiment indicator should work. Now it’s time to look at a practical application. In sentiment indicators, the history being repeated is the unchanging nature of human emotion. Greed and fear drive the markets and they are measurable to some degree. A widely available is the American Association of Individual Investors (AAII) Sentiment Survey. This is a survey of individual investors which answers the question of how they feel about the market each week. Data from 1987 is available at http://www.aaii.com/files/surveys/sentiment.xls. A small part of the survey results from 2000 is shown below. DATE % BULLS S&P 500 CLOSE 1-6-00 75.0% 1,441.47 1-13-00 59.3% 1,465.15 1-20-00 57.1% 1,441.36 1-27-00 53.7% 1,360.16 2-3-00 51.1% 1,424.37 2-10-00 41.9% 1,387.12 2-17-00 27.3% 1,346.09 2-24-00 41.4% 1,333.36 3-2-00 36.7% 1,409.17 3-8-00 58.3% 1,395.07 3-16-00 50.0% 1,464.47 3-23-00 65.7% 1,527.46 3-30-00 38.9% 1,498.58 4-6-00 45.8% 1,516.35 4-13-00 51.9%...

In the Future IBs and Financial Advisors Compete Head to Head

Managed futures mutual funds appear to clear one significant regulatory hurdle Broad distribution of managed futures through a mutual fund structure, which at one point faced an uncertain future, appears to be moving forward, according to Dan Driscoll of industry regulator National Futures Association (NFA). At a recent meeting in Chicago, the NFA brought together top industry participants with divergent interests, from commodity pool operators (CPOs) to existing managed futures mutual fund operators, who, with NFA encouragement, worked out differences to craft potential rule changes that will now go to the Commodity Futures Exchange Commission (CFTC). It is the group's hope that the CFTC, who writes final rules, will consider recommendations from the NFA and industry participants. The NFA pulling together this meeting and crafting an agreement must have been interesting, to say the least. Some CPOs had openly expressed concerns about the managed futures mutual fund structure that limits...

New Rules Likely to Mean Substantial Changes for IBs

A proposed CFTC Rule focusing on preventing conflicts of interest between researchers and traders, and a proposed amendment to another Rule designed to enhance record-keeping and recording requirements, were two of the key topics discussed at the NIBA Sales and Marketing Conference on September 12. The Dodd-Frank Wall Street Reform and Consumer Protection Act mandates the implementation of these Rules, in some form, despite a perceived absence of any problem needing remediation and despite the clear increase in costs that compliance would entail. Feedback from member IBs in attendance confirmed that, if the final versions of the Rules resemble the CFTC’s initial proposals, compliance will require them to materially change their current operations. A brief recap of the Panel discussion on these two topics follows for the benefit of those IBs not in attendance. In effect, proposed Rule 1.71 would require each IB to implement a Chinese wall to ensure...

By NIBARead article

Focus on the Membership

September 23, 2011

3 min read

Focus on the Membership | Featured Member: Great Lakes Global

About You: How did you get started? Do you provide additional services besides brokerage? I began at the MidAmerica Exchange in Chicago in 1976, and have traded on COMEX since 1982. I formed Great Lakes Metals, Inc. in 1987, a floor brokerage and trading firm on COMEX. Currently I serve as Chairman of the COMEX Governors Committee; International Advisor to the Shanghai Gold Exchange; Director at NIBA. I started my GIB in 1995 (now GLT Group). In 2008, I created Great Lakes Global and Great Lakes Hong Kong to offer brokerage services internationally with a focus on Asia. In Asia we also offer technology consulting, market research, and educational services. What are the biggest challenges your clients face today, and how do you help them? Since we do business in Asia, communication is key. We have a 24 hour order and service desk in Hong Kong with English, Mandarin and...

Chairman's Message | September 2011

Dear NIBA Members - Over 190 members attended the NIBA membership meeting last week in Chicago. Thanks to all our sponsors and speakers for making this another successful NIBA event. To continue the conversation with any of the speakers, just go to our conference page and click on an email address. I am always impressed with the people at our meetings. Of course the speakers are great. They are prepared, topical and deliver terrific ideas to help you increase business the minute you leave the meeting. But it is the members themselves that really impress me. In 20 years at the NIBA, I have met a diverse group of men and women who have changed and adapted as the industry and their clients’ needs changed. I admire our members who have had to learn to embrace technology, who must continually update their industry knowledge and who eagerly learn new marketing...

The Risk of Futures

In my book Jackass Investing: Don't do it. Profit from it., I take on the myth that "Futures Trading is Risky." I do this by first pointing out that it’s not futures that are risky, but the often reckless behavior of individual futures traders. If the proper risk controls are not in place and if leverage is abused, substantial losses will occur. But this reckless behavior is not unique to futures trading, stock investors often routinely and recklessly expose themselves to unnecessary risk (my definition of "Jackass Investing") by hanging on to losing positions. In fact, it's the cornerstone of the "buy-and-hold" mantra. You need only look back over the past decade to see numerous instances where supposedly diversified stock portfolios incurred losses that exceeded 30%. The reality is, with the diversification opportunities that are available in the futures markets, a portfolio of futures, managed properly, should be less risky...

Understanding Public Perceptions on the Market with Technical Analysis | Part 1

A number of Nobel Prize winning theories start with the assumption that investors are rational. In the real world, many investment professionals discover through their daily interactions with investors that there are occasional bouts of irrationality. In discussing the markets with the public, it’s important to understand this since questions and firmly held beliefs could be rooted in that irrational behavior. Rational investors most likely only exist in Modern Portfolio Theory. The argument makes sense intuitively. Investors will buy the portfolio that maximizes the potential returns while minimizing their personal preference for risk. But in the rule world, emotions like far and greed, infiltrate the decision making process. Potential returns are generally defined by discounting the future cash flows of an investment back to its present value. In theory, some investments will be undervalued and these should be bought. Others will be overvalued and would be avoided, or sold short...

By NIBARead article

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