Reuters: Regulatory News: INTL FCStone joins chorus of critics against CFTC margin rule

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INTL FCStone joins chorus of critics against CFTC margin rule May 9th 2013, 21:50 Thu May 9, 2013 5:50pm EDT * New rules will likely force brokers to hike fees * 2nd qtr weaker than expected due to lower ags volumes * Broker expects to exit physical base metals by fiscal year-end By Josephine Mason NEW YORK, May 9 (Reuters) - New rules proposed by U.S. regulators will increase costs and inflict long-term damage on commodity futures brokers and their customers, INTL FCStone Inc executives said on Thursday, adding to growing industry criticism of the plan. A new regulation, included in the landmark Dodd-Frank financial reform act but not yet enforced, would require futures brokers "at all times" to have funds that exceed the sum of customer deficits. After the abuse of customer funds at failed brokerages MF Global and Peregrine Financial, regulators say the rule will help protect customer money by preventing the use of extra funds from one customer to cover temporary shortfalls of another. But brokers say it would upend practices that allow them to credit the excess funds of some customers against the deficits of others for short periods, reducing costs for all traders while protecting funds from improper use. Futures commission merchants now face a dilemma: take on the additional financial burden during one of the industry's most fragile periods or risk losing business by charging customers more to trade. The latter will likely prevail, said INTL Chief Financial Officer Bill Dunaway. "FCMs won't really have a choice but to push that down to their clients if regulatory change like this comes through," he said in a conference call to discuss the firm's quarterly results released late on Wednesday. For the fiscal second quarter ended March, net income sank almost 90 percent from the previous quarter and 38 percent from a year earlier due to lower trading volumes from the core agricultural customer base. Dunaway's comments echo criticism from other brokers who say the new rule will increase costs and threaten the future of the industry. The Commodity Futures Trading Commission (CFTC) has said it would consider adjusting the rules. Commodity futures brokers say operating costs have already soared in recent years in response to greater regulation. Profit margins are already wafer-thin due to intense competition for business and the industry is still suffering from scandals surrounding the collapse of MF Global and Peregrine which knocked customer confidence and hurt trading volumes. Even before those crises, brokers were struggling with falling commission fees amid stiff competition for business. Historically low interest rates have also deprived them of the revenue they used to earn on the cash in customer accounts. Increasing costs will also hurt commercial hedgers such as copper fabricators and grain elevators. "There are consequences (to greater regulation) ... And that may impact the people they're trying to protect," said INTL FCStone's chief executive, Sean O'Connor, on the same call. "It will be interesting to see how they (the CFTC) square that circle." WEAKER THAN EXPECTED The executives' comments came after the company reported weaker-than-expected quarterly results. After last year's drought swept across the U.S. Corn Belt and wiped out crops, grain elevators and merchants had little excess stock to hedge. Lower prices since the soaring markets last summer have also reduced the need to hedge new crop production. With a record crop coming to the market in 2013/14, hedging opportunities will improve, O'Connor said. Even so, the firm continues to cut costs. As part of an effort to rein in risk and curb exposure to capital-intensive businesses, O'Connor said INTL FCStone will pull out of the physical base metals trading business, confirming a report by Reuters last week. Winding down the operation will last until the end of the fiscal year at end-September, but will cut funding needs by some $100 million, he said. Reuters reported last week that the seven-strong team will join Vision Financial, a smaller FCM. "The financial world has become more competitive and there is still significant overcapacity out there. Being a low-cost provider will be our focus," he said. The company's London Metal Exchange metals futures brokerage team generated $7.7 million in revenue in the quarter, unchanged from last year. Link this Share this Digg this Email Reprints

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