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Industry Spotlight > Clearing and Custodial Firms

Moran's Subcommittee Discusses the Future of Futur

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WASHINGTON (–Rep. Jerry Moran, (R-Kan.), chairman of the subcommittee on general farm commodities and risk management, Agriculture Committee, presided over a hearing on the issues that have arisen thus far in the implementation of the Commodity Futures Modernization Act of 2000.

In his brief opening remarks June 19, Mr. Moran said that subcommittee members hoped to learn whether “the appropriate level of regulatory relief was enacted and determine if Congress was successful in its attempt to develop a level of regulation that allows U.S. markets to compete effectively, while protecting market integrity for all participants.”

Daniel J. Roth, president of the National Futures Association, was one of those witnesses. Mr. Roth warned that the statute might have inadvertently opened a loophole encouraging hundreds of unregistered and unregulated entities to solicit business from retail foreign-exchange customers.

The loophole he was referring to was the result of a clause in the statute stating that if an “otherwise regulated entity” is the counterparty to a retail forex trade, the regulatory provisions of the Commodity Exchange Act do not apply. This leaves open the possibility that the people actually working the phones, not themselves parties or counter parties, may be completely unregulated. Furthermore, a number of firms that have never done any futures trades appear to have registered as futures commission merchants and become NFA members for the sole purpose of qualifying as otherwise regulated and thereafter doing retail forex trades outside the Commodity Exchange Act.

“From NFA’s perspective,” Mr. Roth said, “these firms are not really otherwise regulated because all of our rules apply to exchange-traded futures and options transactions and do not generally apply to off-exchange forex transactions.”

Mr. Roth did not propose any statutory fix to this problem but indicated he might come back to Congress with reform proposals in the future, depending upon the results of the NFA’s continued monitoring of the activities of its forex trading members.

As Mr. Roth pointed out, the NFA is the industry-wide self-regulatory organization, with 4,000 members including FCMs, introducing brokers, commodity pool operators and commodity trading advisers.

The president of the Futures Industry Association, John Damgard, also testified at the subcommittee hearing. Mr. Damgard directed much of his attention to the matter of competitive clearing.

He said that the FIA has long sought an agreement among the futures exchanges to create “an independent clearing organization, to be operated like a utility, that would be jointly owned and governed by its members and the exchanges. Unfortunately, a final agreement was never reached.” In the absence of such a comprehensive solution, the FIA has explored alternatives including the development of a centralized capital facility, which would consolidate position information, centralize performance collateral as “an effective means of providing portfolio margining to clearing members and their customers.” He said that the FIA believes this is consistent with the broad policy goals and directives of the Commodity Futures Modernization Act.

“We cannot leave the topic of clearing without acknowledging the common clearing link that the Chicago Board of Trade and the Chicago Mercantile Exchange have announced,” he said. “The Chicago Board of Trade and the Chicago Mercantile Exchange, in the aggregate, account for approximately 85% of all U.S. futures exchange volume. Therefore, this initiative holds the promise of providing certain benefits for which we have long argued. To this end, we have advised the leadership of both exchanges that we stand ready to work with them to resolve the numerous questions that are certain to arise as the business and operations details of their arrangement are implemented.”

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