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In the course of performing research on this subject about a month ago,
I found and downloaded an Excel spreadsheet from the CFTC web pages
which set forth the latest available customer funds and adjusted net
capital for FCM's. Some FCM's showed no customer funds, so I deleted
them. I then added a column to the spreadsheet which calculated the Net
Capital ratio. A copy of that spreadsheet is attached. PLEASE NOTE THAT
MY MACHINE IS HIGHLY SECURE AND BELIEVED TO BE VIRUS FREE, HOWEVER IT IS
POSSIBLE FOR AN XLS FILE TO CONTAIN A VIRUS.
As I remember, the minimum ratio required by the CFTC is 4%, however two
firms have ratios under 4%. Required margin on a corn contract is about
$500 which is roughly equal to a 10 cent move. Required margin on an S&P
contract is about $24,000 which is roughly equal to a 100 point move.
Many, but not all, of the firms with exceptionally high ratios are giant
investment banking firms which don't offer retail discount brokerage
service. Many, but not all, of the firms with commonly recognizable
names fall into the lower quartile (0%-12%).
Earl
----- Original Message -----
From: <I4Lothian@xxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Tuesday, February 22, 2000 2:12 PM
Subject: [RT] FUTR: Is your FCM prepared for a stock market crash?
> Last year when Gold shot up suddenly, something happened. FCMs which
> had a concentration of clients following certain gurus, or gold bugs
or
> Y2K disaster scenarios suddenly realized a huge increase in customer
> equity.
>
> The owner of one large retail group at a midsize FCM I know of
confided
> to industry friends that the gold surge was the largest single daily
> increase in equity his firm had ever had in 20+ years in the industry.
> That same firm is now supposedly looking for a new clearing firm
> relationship. Whether those two facts are related is not known.
>
> What is known though, is that for a smaller privately owned FCMs, a
huge
> increase in customer equity from a big market move can be a cost
raising
> experience. If the FCM owner doesn't have the cash or securities
> readily available, then they have to use lines of credit to add
capital
> to meet regulatory requirements. Use up the normal lines of credit
> because of an exceptional move in customer equity, and capital might
get
> more expensive for the smaller FCM. This assumes the capital is
> available. It could also mean brokerage firms reining in skilled
> proprietary traders during times of good opportunity because they
don't
> have the capital necessary to facilitate their needs.
>
> The other way for FCMs to get under the regulatory requirements during
> times when their own equity is not enough to meet the regulations and
> other capital is hard to come by or costly to acquire, is to send home
> customer equity. That means the account you have sitting on the
brokers
> books, but have not traded recently, has a good chance of getting
> temporarily jettisoned if your FCM needs to repatriate to clients the
> customer's equity to meet capital requirements.
>
> Now, I am not saying a crash is imminent, though it is a much
discussed
> issue these days. I am not saying that there are FCMs which are ill
> prepared to meet extraordinary demands for capital, though there are
> differences among FCMs worth noting. However, it is wise to be aware
of
> what can happen if a firm over leveraged firm is caught in a sudden
need
> to meet regulatory capital requirements due to client successes.
>
> Personally, I think the concentration of index traders at some firms
> could be a concern. Late last year I was hearing stories of retail
> brokerages where 70% of the monthly volume for the whole firm was in
the
> indices. A lot of this was e-mini traders and online traders. A firm
> with a customer profile like that, which was already in a highly
> leveraged capital to customer equity position, could be a candidate to
> have to send out equity.
>
> Maybe getting your money out of a brokerage firm during stock market
> volatility is not all bad. However, if you were expecting to be able
to
> actively trade, and you find you have no money in your account it
would
> be a problem.
>
> Sometimes during chaotic times, brokerages find a big brother firm to
> shore up their capital requirements. A FCM which uses a bank as an
> exchange clearing relationship might be in a better position than an
FCM
> which is a stand alone FCM/Clearing member all in one, depending on
> their size and if they have a corporate parent with a large
> capitalization and such.
>
> I write this not trying to scare people, but rather to raise
awareness.
> I write this acknowledging that I have conflicts of interest on the
> subject, as my employer is a Guaranteed IB with a clearing agreement
> with a large multinational futures clearing firm with a what I
consider
> a big balance sheet. Thus, take my words with a grain of salt.
>
> My suggestions to traders if they were concerned with this issue would
> be to look over the capital to customer funds ratio of the FCM which
> holds your account. This information is available from the CFTC
> website. Compare this ratio to other firms with similar customer type
> profiles and see where it falls. If you have some reason to be
> concerned, consider opening a second commodity account at a firm with
> big balance sheet and a more balanced clientele. If your primary
broker
> needs to send out some funds, they can send them right to your
secondary
> broker and you don't miss a beat.
>
> Regards,
>
> John J. Lothian
>
> Disclosure: Futures trading involves financial risk, lots of it!
>
> Disclosure: John J. Lothian is the President of the Electronic Trading
> Division of The Price Futures Group, Inc., an Introducing Broker
> clearing ED&F Man International, Inc.
>
>
Attachment Converted: "f:\eudora\attach\FCMFinancialRatios.xls"
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