NIBA Journal

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

August 6, 2013

Not a NIBA Member Yet? No Problem.

Are you planning on attending the NIBA fall conference in September, but youʼre not a member yet? No problem. You can join the Association when you register for the conference. Attendance at the event is complimentary for NIBA members. IBs and CTAs pay $150 per year. APs pay $75 per year. Also included in the IB and CTA membership is a subscription to the NIBA Journal, our online Newsletter and a listing in the online Broker Directory for the remainder of 2013. FCMs, Service Providers and others are urged to contact me directly. The NIBA membership meeting is more important than ever this fall. NFA and CFTC regulation changes will affect your day-to-day business. Reporting and recording requirements, plus potential substantial changes in FCM capitalization requirements will have an effect on your daily operations. Each of our business sessions will help you understand, prepare and comply with the NFA and...

NIBA Legal Update Panel Preview

I have the privilege of leading the NIBA Legal Update once again this year. This panel of industry experts including Mike Coglianese and Jeff Kopiwoda will address legal developments - CFTC, NFA and others - which will affect an IB or CTA business. One issue we will discuss is CFTC Reauthorization and why it is important to each of us. The NIBA has submitted a number of suggestions to the U.S. Senate Committee chaired by Debbie Stabenow which is responsible for the reauthorization process. Included are comments on customer protections, liquidation processes in the event of an FCM bankruptcy, Reg. 1.35 Recordkeeping Requirements, customer account insurance and FCM bankruptcy reform. We will be include all of this and more in our panel at 2:30pm, September 18, CME Group Building, Chicago. I look forward to seeing you in Chicago. Please contact me directly if there are issues you would like addressed...

Global Macro Economics Perspectives

In the United States, all eyes are on the Federal Reserve (Fed). There are three big questions. When and how fast will the Fed begin tapering its asset purchases (QE exit)? Who will President Obama appoint to be the next Chair of the Fed? And finally, well into the future, when will the Fed abandon its near-zero target federal funds rate and start raising rates. A qualified answer to the QE exit question may come on September 18, when the Fed issues its press release from its FOMC (Federal Open Market Committee) meeting. Whatever tapering may be announced, though, its future course is likely to be nearly totally dependent on the evolution of labor market trends. Our perspective is that we are headed for slow yet steady progress, despite some serious headwinds from fiscal policy in the US and only modest growth internationally. Perhaps, more interesting for the long-run course...

Why Past Performance of a Conventional (60-40) Portfolio Is NOT Indicative of Future Performance: Part 2

As discussed in Part 1 of "Why Past Performance of a Conventional (60-40) Portfolio Is NOT Indicative of Future Performance", the results of a conventional 60-40 portfolio over the last 30 years aren’t likely to repeat in the near future. Going forward, if the P/E ratio reverts to its long-term average of 16.4, corporate profits grow at their historical average of +4.70%, and dividends increase at the same rate as corporate profits (and the dividend payout ratio increases to its long-term average), stocks will appreciate at just 7.05% per year over the next decade. Here’s the arithmetic. Future returns from U.S. equities To determine the likely return for the S&P 500 over the remainder of this decade we need three primary inputs: The rate of earnings growth for the companies underlying the index, The most likely P/E ratio people will pay for those earnings at year-end 2020, and The dividend...

Marketing of Commodity Trading Advisors

With expanding areas of potential client pools and capital, commodity trading advisors (“CTA”) are often looking outside of their firms to tap into these untouched resources. To accomplish this, CTAs often contract with an introducing broker (“IB”) whose sole goal is to bring the CTA new clients. This article discusses the terms of the relationship and highlights some things all parties should be aware of. In order to facilitate an efficient and beneficial relationship between a CTA and placement agent, it is highly recommended that the parameters of relationship are memorialized in writing via a “Placement Agent Agreement.” These agreements set out the general rights and obligations of either party, discuss the specific services to be rendered and the compensation for such services, and set forth the term of the relationship. Specifics of Placement Agent Agreements: Things to Keep in Mind While the specifics of each placement agent agreement will...

By NIBARead article

August 6, 2013

3 min read

What Constitutes a Swap?

In a sense, introducing brokers act as gatekeepers to the futures and derivatives markets. Following the passage of the Dodd-Frank Act, certain OTC products which were formerly not regulated are now subject to the CFTC’s jurisdiction. Firms that deal with these products may need to be registered and the products traded may need to be cleared at an exchange. A customer may contact an introducing broker with a particular trade that it wants to make, but will probably not be concerned whether the trade is legally classified as a future, swap or forward. However, it will make a difference to the introducing broker. As registrants, introducing brokers need to be aware of these different products, especially those now classified as “swaps,” and the ramifications of this classification. The CFTC’s definition of swaps includes those products traditionally considered swaps, such as credit default swaps, equity index swaps, and interest rate swaps.(1)...

By NIBARead article

August 6, 2013

3 min read

Overview of AML Policies and Procedures for Introducing Brokers

Federal law and NFA rules require Introducing Brokers to maintain an Anti-Money Laundering program implemented by written policies, procedures and controls. NFA provides a number of materials to help IBs ensure their AML programs are compliant, including the Self-Examination Checklist, Exhibit A thereto, and other materials on NFA’s website. The AML program has several components as described below. IBs must designate one or more individuals to oversee the AML program and on an annual basis must have an independent audit of their AML program and train employees on AML procedures. 1. Customer Identification Program (“CIP”) The CIP must allow the IB to establish a reasonable belief that it knows the true identity of its customers. The CIP must provide that the IB will request certain information from the customer and will verify that information using documentary or non-documentary sources, must explain when steps will be taken if the IB cannot...

By NIBARead article

August 6, 2013

6 min read

Common Mistakes, Introducing Brokers and AML Procedures

Most introducing brokers (“IBs”) view their Anti-Money Laundering (“AML”) obligations quite minimally but this can be a monumental mistake. Generally IBs believe their AML responsibilities are limited to ensuring a compliance manual is on file and that annual AML training has been completed by necessary employees. This belief is typically the result of customer accounts being held and funded through a Futures Commission Merchant (“FCM”). Since client accounts are processed at an FCM, IBs take direction from the clearing firm regarding their Customer Identification Program (“CIP”). While this may make sense in some instances introducing brokers tend to rely on FCM’s to such an extent that they largely abdicate their AML responsibilities. AML Policy Obligations The aforementioned practice is potentially detrimental to the IB, the FCM, and the overall AML process itself. There are three primary components of Anti-Money Laundering procedures; prevention, detection, and reporting. Prevention is largely addressed through...

By NIBARead article

August 6, 2013

4 min read

Understanding an IB's AML Program Requirements

Since April 24, 2002, NFA Compliance Rule 2-9(c) has required all NFA Member FCMs and IBs to have an anti-money laundering (AML) compliance program in place. At a minimum, the AML program must establish and implement policies, procedures, and internal controls reasonably designed to assure compliance with the applicable provisions of the Bank Secrecy Act, designate an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program, provide for independent testing for compliance to be conducted by Member personnel or by a qualified outside party, and provide ongoing training for appropriate personnel. NFA Compliance Rule 2-9(c) and the related interpretive notice set forth the minimum standards and provide Members with additional guidance to create and implement an adequate program. In 2010, NFA launched an online system designed to help FCMs and IBs develop AML programs that meet the requirements of the BSA and...

By NIBARead article

August 6, 2013

2 min read

Still Stupid After All These Years

To be perfectly honest, I’m not sure any professional Fund of Fund managers anywhere would admit using any of the techniques below, much less advocating their use. That said, in my experience, these techniques are both popular and bone-stupid. Hiring People with Charisma Charisma doesn’t count. It’s not evidence. Hiring People without doing all of your Homework Many FOF managers do only part of their job and fight any suggestion that there is anything else in the world that might be of some importance. Naturally, this problem is not limited to FOF managers. Consider, as an example, that in 2008 the various bond-rating services rated collateralized mortgage obligation without looking at individual mortgages. Hiring people from your affinity group An affinity group is any group its members consider important. The question is not whether someone is a member of your group. The question is whether or not that person can...

By NIBARead article

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