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What’s Missing in the Debate over Residual Interest Income: Monopolistic Control Over Futures Industry Brokerage

While it sounds mundane, the “Residual Interest Income” issue has the potential to literally change the face of the regulated derivatives industry.

In just one line of a massive Dodd Frank bill with unnecessary complexity and obfuscation, large bank interests may complete monopolistic control over the derivatives industry.

This is the point that has been absent from many of the industry comment letters and should be on the radar of government regulators.

To understand, keep the topic simple.

With one line amongst millions of legislative words, government regulators will effectively dis-advantage mid-sized Futures Commission Merchants (FCMs), likely forcing many out of business, which has been widely discussed and commented on.  The point missing in discussions is the implications, the “unintended” consequences of how this provides literal control of the futures brokerage industry by a small cartel of banking interests with a Too Big to Fail guarantee.

Monopolistic control over the futures industry is not a new topic.  The discussion has always taken shape on the exchange side of the business.  Brokerage has not been actively considered in the public discussion, but the impact could be the same.

Consequences for farmers and hedgers could be dramatic, as most of these independent business executives work with mid-sized brokerage firms.  In effect, this could impact the stability of the market, which is why certain large bank executives might have taken the side of independent FCMs.

In particular Mike Dawley of Goldman Sachs has been a vocal voice in the logical questioning of the impact on market ecosystem, as have many industry participants including The Commodity Customer Coalition and The National Introducing Brokers Association, who stands to be decimated if the “residual interest” issue is allowed to create a large bank monopoly in the commodity markets.

At a minimum the long term impact of this issue should be studied by the CFTC and openly discussed relative to the impact it might have on hedgers and creating a monopoly in a key sector of the US financial services industry.

DISCLOSURE: These are the opinions of the author and may not have considered all risk factors. Nothing on this web site should be construed as an individual recommendation, talk to your independent advisor. The author and Opalesque may have relationships with those people they cover in the publication. Mr. Melin provides a full disclosure of his business relationships to regulators and certain eligible participants who engage him in consulting projects. Managed futures investing involves risk and there are no guarantees of safety or future performance being implied. Managed futures can be a risky investment. This web site and its content is subject to the terms of the web site. Risk Disclosure and terms of web site are available here: http://www.uncorrelatedinvestments.com/templates/Disclaimer.html Performance information received on this site is provided by third parties and deemed reliable but there is no guarantee relative to same. Performance reporting sources and quality assurance techniques may include, but are not limited to: disclosure document, CTA self reporting, brokerage firm reporting, consultant reporting, spot checking other reporting databases; nonetheless no guarantee of accuracy or implication performance verification or auditing is being made by the publishers. The CTA Database is a project separately managed from www.uncorrelatedinvestments.com.

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