The Costs For Dodd-Frank Are Just Beginning

Posted by Jeff Carter
on August 20th, 2012

Today in my email I received a notice from FC Stone. They sent it because of Dodd-Frank. It’s 16 pages of legalese. One might think, “They emailed it. No postage it’s just hit the send button.”. However, how many hours went into that 16 page document? How many attorney’s were involved? How many consultants? How many employee hours were burned writing that 16 page document when they could have been doing something else?

The document starts,

Dear Customer,
In 2010, President Obama signed the Dodd-Frank Act into law. As a result, many new regulations will affect the commodities industry and will impact how FCStone, LLC does business. Where any particular rules or regulations affect you directly, FCStone, LLC will work with you to meet those new regulatory requirements. The items supplementing this letter are intended to address two such instances.
Conflicts of Interest
Futures Commission Merchants, such as FCStone, LLC, are now required to disclose potential conflicts of interest that a company may have with customers.
Please find attached the FCStone, LLC Disclosure of Material Conflicts of Interest. This is for your informational purposes, and does not need a signed acknowledgemen

Okay. I never knew that FC Stone might be in conflict with me. I knew MF Global was in conflict with its customers, heh.

The document then goes into over the counter (OTC) trades. You do have to sign the document if you are an OTC trader. Firms now tell their customers that they might trade against them.

Under applicable law, including regulations of the Commodity Futures Trading Commission (“CFTC”), not all swaps are required to be executed on an exchange or swap execution facility (each, a “Trading Facility”), even if a Trading Facility lists the swap for trading. In such circumstances, it may be financially advantageous for FCM or its affiliate to execute a swap with you bilaterally in the over-the-counter market rather than on a Trading Facility and, to the extent permitted by applicable law, we may have an incentive to persuade you to execute your swap bilaterally.

In addition, where permitted by applicable law (including, where applicable, the rules of the applicable Trading Facility), FCM, its directors, officers, employees and affiliates may act on the other side of your order or transaction by the purchase or sale for an account, or the execution of a transaction with a counterparty, in which FCM or a person affiliated with FCM has a direct or indirect interest, or may affect any such order with a counterparty that provides FCM or its affiliates with discounts related to fees for Contracts or other products. In cases where we have offered you a discounted commission or clearing fee for Contracts executed through FCM as agent or with FCM or its affiliate acting as counterparty, FCM or its affiliate may be doing so because of the enhanced profit potential resulting from acting as executing broker or counterparty.

This is only the beginning. When all the blanks are filled in, the level of regulation and increase of costs will go up exponentially.

Obamacare was the worst law enacted in the last four years, Dodd-Frank is a close second. Obama wants to control your health care, and your money.

UPDATE

CME Group ($CME) decides to build an overseas exchange. These comments from this article are telling.

Monday, Derek Samman, managing director of CME Group’s global interest rate and FX business, made it crystal clear to industry specialist newspaper Financial News, noting CME believed “clients should not have to choose to trade with us in the U.S. regulatory environment or not to trade with us at all. That is not a real choice.”

It’s a pattern for CME. In June, according to Financial News, the company’s chief executive had told a technology conference that clients had raised concerns that they would actually have to comply with new rules set up by the implementation of the Dodd-Frank financial regulation law if they traded within U.S. markets.

“The question that many of our clients ask is if they are going to get ‘Dodd-Franked,’” CEO Gill Phupinder said.

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