NIBA Journal

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

August 6, 2013

Five Ideas of CTA Due Diligence

Over the years I’ve found people perform varying degrees of due diligence of a Commodity Trading Advisor (CTA). Some may only crunch the returns of the manager. Others will only ask the CTA to fill out a due diligence questionnaire and some will do a full due diligence process on the manager including research and operational due diligence. The first two points listed are good places to start, but is not the ending point as your goal is to get as close to a full due diligence process as possible. Regarding the research/strategy component of due diligence, below are five major ideas to keep in mind when performing due diligence on a manager: 1) You want to know and understand as much as possible about the manager’s strategy. In my article from a few years ago “Decoding the Myths of Managed Futures” I mentioned that some have stated they were...

By NIBARead article

August 6, 2013

2 min read

New Recording Requirements; Compliance Deadline: December 21, 2013

The CFTC has amended its Rule 1.35 to require futures commission merchants (FCMs), certain introducing brokers (IBs), retail foreign exchange dealers and certain other registrants to record all oral communications that lead to the execution of a transaction in a commodity interest. The new rule became effective on February 19, 2013, and compliance with the new oral communications recordkeeping requirement must be implemented by December 21, 2013. At the Chicago NIBA Conference on September 18, 2013, the Legal Update Panel will be discussing a number of new rules and what they mean for industry participants. Among other topics, the discussion concerning amended Rule 1.35 will include: which IBs are exempt from the new oral communications record keeping requirement; how industry participants may obtain relief from the CFTC in the form of an alternative compliance schedule; protective measures that registrants should consider implementing to avoid running afoul of state and federal...

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August 6, 2013

2 min read

NFA Representatives Panel Preview

I’ve been asked to moderate the NFA Representatives Panel at the upcoming NIBA membership meeting in September. This is an opportunity I’ve been hoping for -- an opportunity to discuss specifics with our elected representatives. I’ve wondered how the IB and CTA representatives to the NFA interact with other Board of Director members - do they get together ahead of the meetings to discuss issues to bring before the Board? I’ve wondered how they interact with NFA staff - do they have regular communications with staff members to update themselves on topics on which the NFA is working? How carefully are they following the CFTC and other regulators? Do our representatives bring specific issues proposed by the communities they represent before the NFA Board or do they simply address those topics brought to the table by the NFA? As a longtime member of the NIBA, I am aware of the...

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August 6, 2013

2 min read

From Paul J Georgy, GIB Representative on NFA Board of directors

The CFTC is not done writing rules mandated by the Dodd-Frank Bill. Customer protection is the focus and who can argue with that? However, it will have an impact on the way FCMs and IBs do business. Currently the CFTC is considering a change in margining policy requirements. That means FCMs must have the ability to calculate accurate margin requirement intraday. The changes may cause intraday margining by certain participants and will increase capital requirements of FCMs. The trickledown effect on the IB could require our retail clients to meet margin calls daily. The old way of receiving a check by mail will not be good enough for some FCMs. There will be a comment period notice in the Federal Register. Make sure you comment on your behalf directly or through the NIBA. Another rule that will impact some IBs is the new taping requirement of all conversations that lead...

MF Global Trustee to Boost Distributions to Ex-Customers

MF Global Inc.’s former customers should get “significantly” increased distributions in coming months, and the goal is still 100 percent recoveries, the failed brokerage’s trustee said. Customers who traded on U.S. exchanges may get distributions starting in early September that would bring their percentage recoveries into “the high nineties” while customers who traded on foreign exchanges may get “in the sixties,” trustee James Giddens said in a statement today. “These further distributions are dependent on final approval of a motion by the trustee to confirm the allocation of property already received,” Giddens said. His projections assume that agreements with MF Global’s U.K. unit and JPMorgan Chase & Co. (JPM) take effect in mid-August. A prior projection in June estimated customers would get 94 cents on their dollar. Giddens said at the time that disputes including a lawsuit against directors and officers delayed the potential for full recovery. Most customers have...

MF Global Agrees to Pay Customers 100% to Settle CFTC Suit

Last week, CFTC and MF Global Inc. agreed to a settlement whereby MF Global Inc. would pay restitution to its former commodity customers to bring them to a 100% return of their accounts. This restitution, which requires judicial approval, would likely involve the trustee sending out checks bringing both 4d domestic futures customers and 30.7 foreign futures customers to 100% toward the end of 2013. The trustee indicated in a consent order filed on the MF Global Inc. docket that the trustee will wait to receive a payment from the MF Global UK affiliate before requesting court authority to make the 100% restitution payments. The trustee expects to receive that payment from the affiliate around September 10, 2013, and the trustee would then file the request within five days of receiving the payment. The processes of achieving court approval and mailing checks may each then take several months, bringing customer...

NIBA Board of Directors Letter to Senate Committee

July 1, 2013 The Honorable Debbie Stabenow Chairwoman U.S. Senate Committee on Agriculture, Nutrition and Forestry 328A Russell Senate Office Building Washington, DC 20510 The Honorable Thad Cochran Ranking Republican Member U.S. Senate Committee On Agriculture, Nutrition and Forestry 328A Russell Senate Office Building Washington, DC 20510 Dear Chairwoman Stabenow and Ranking Member Cochran: The National Introducing Brokers Association appreciates the opportunity to submit the following comments to the Senate Agriculture Committee (Committee) with regard to issues relating to the reauthorization of the Commodity Futures Trading Commission (CFTC). The National Introducing Brokers Association (NIBA) is a non-profit membership association of Introducing Brokers (IBs), Commodity Trading Advisors (CTAs) and Associated Persons (APs). Founded in 1991, the NIBA’s purpose is to provide education to registrants primarily engaged in futures and options transactions on behalf of retail market users. The Association has the support of Futures Commission Merchants (FCMs) and Exchanges, and has...

CTAs: Trend Following is What They Do

There was an odd story in the Financial Times titled, “Quant hedge funds hit by US bonds sell-off.” It was odd in that it treated a rather obvious observation as something more ominous and didn’t seem to have an understanding of the industry they were writing about. It further identified the “quant hedge funds” as “so called CTAs.” Someone needs to inform the FT and the author Sam Jones that CTA is a term of art, a regulatory designation meaning Commodity Trading Advisor (CTA). These CTAs trade futures contracts through various strategies on behalf of customers to hopefully earn positive returns similar to equity based mutual funds. Unlike mutual funds, however, CTA programs are absolute return vehicles that do not rely on positive equity performance. CTAs can go long or short a variety of futures markets across numerous sectors including fixed income, currencies, equity indexes, energies, livestock, grains, metals and...

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

For the past 31 years , a conventionally-diversified portfolio consisting of 60% stocks and 40% bonds has provided investors with satisfying returns of +10.80% annually. This was the result of both stocks and bonds advancing strongly throughout that period. Better yet, stocks and bonds complimented each other nicely. When stocks returned +19.35% annually from the market low in 1982 to its peak in August 2000, bonds lagged somewhat (although still returning a substantial +10.34% annually). But in the period from the 2000 market peak to the 2009 market low, while stocks declined a sharp -43.51%, bonds balanced that with a strong +61.78% rally. More recently, both stocks and bonds have advanced, with the 60-40 portfolio gaining an annualized +15.36% from the market low in March 2009 to May 31, 2013. The past 31 years was an unprecedented period for a 60-40 portfolio; one that wasn’t seen prior. In fact, as...

By NIBARead article

June 26, 2013

5 min read

CFTC Issues Interpretive Letter on Regulation 1.73

Recently, the Commodity Futures Trading Commission (“CFTC”) issued an interpretive letter regarding new CFTC Regulation 1.73 and its applicability to introducing brokers (“IBs”) that enter into give up arrangements with their customers' clearing futures commission merchants (“FCMs”). In its letter, the CFTC confirmed that the term “executing firm” in Regulation 1.73 refers to both IBs and FCMs that execute orders for customers, requiring IBs who execute give-up orders on behalf of their clients to adopt risk management procedures. Background on CFTC Regulation 1.73 By way of background, adopted in 2012 as part of the Dodd-Frank Wall Street Reform Act, Regulation 1.73 requires clearing FCMs (and in some instances any “executing firm”) to establish risk-based limits for their proprietary and customer accounts based on position size, order size, margin requirements, or similar factors, and requires FCMs to screen orders for compliance with those risk-based limits. Clearing FCMs are permitted to retain...

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