Risks in opening futures accounts through Independent Introducing Brokers

Discussion in 'Retail Brokers' started by wwx, Jul 4, 2006.

  1. wwx


    It seems that larger clearing FCMs like Fimat don't cater to serious retail traders directly. However, there're quite a few independent introducing brokers which use big clearing firms like GS, Fimat, Merrill, etc and allow an individual trader to open and maintain accounts with these clearing FCMs.

    I wonder if any fellow ET member might be able to offer any pointers regarding the pros and cons of opening an account with a large clearing firm through an introducing broker (especially any less apparent risks or downside).

    The primary concern is fund security and credit risk. It can be assumed that the additional layer of fees/commissions charged by the introducing broker is acceptable.

    In particular, how important/relevant is the size of an introducing broker's capital, given that the futures account will in fact be opened and maintained with a much larger clearing FCM (and customer funds held in a segregated account arranged by such FCM)?

  2. IB -- In the event of financial disaster, recovery is limited to the resources of the IB only.

    Guaranteed IB -- In the event of financial disaster, recovery is firstly based on resources of the IB, and secondly the guarantor of the IB, likely a well capitalized FCM.

    FCM/Self-Clearing -- In the event of financial disaster, recovery is based on resources of the FCM. It must be understood that if the FCM has IBs and/or Guaranteed IBs, a pecking order for recovery gets established; all accounts, direct with FCM or via IBs, are affected in this scenario.

    For maximum safety, in terms of this discussion, a Guaranteed IB is the best choice.


    EDIT: here's a thread that morphed into a discussion of segregated funds, a very misunderstood aspect of futures accounts. http://www.elitetrader.com/vb/showthread.php?s=&threadid=69275

    CAREFULLY read account docs! And don't confuse SECURITY futures with non-security (indexs, ags, softs, rates, etc) futures... most docs nowadays place SECURITY futures segregated account protection in the forefront, which is totally different (and much more protective for account holders) than non-security futures.
  3. Osorico,

    I believe you were in error to state that some U.S. introducing futures brokers are not guaranteed by any FCM (clearing broker), so that in the event of the broker's bankruptcy, recovery is limited to the broker, and there is no recovery from the FCM. If you are sure you were correct, then would you kindly direct me to an internet link or other information source confirming your assertion?

    I believe you were also in error to state that some accounts, held at an FCM, will have priority over others, depending upon which accounts came thru introducing brokers and which did not. I believe all futures accounts are held at some FCM, regardless of whether or not an introducing broker is involved, and that if the FCM fails, no account gains or loses any priority in bankruptcy based on whether it came thru an introducing broker. If you are sure you were correct, then would you kindly direct me to an internet link or other information source confirming your assertion?

    Would you also please explain why you believe an introducing broker can be safer than a clearing broker?
  4. http://cftc.gov/opa/glossary/opaglossary_g.htm

    Define of Guaranteed IB @ bottom of page. There is a definite distinction between IB and Guaranteed IB... Fact, not my assertion.

    Osorico :p
  5. I think I see the source of your mistake. Please let me know whether or not I am correct. Every FCM is fully responsible for safekeeping of all customer property, regardless of whether or not those funds came thru an independent or guaranteed introducing broker. Every FCM guarantees the return of all customer property, in the event of an introducing broker's bankruptcy. The difference between an independent introducing broker, and a guaranteed introducing broker (GIB), is that the GIB's FCM additionally guarantees ALL of the GIB's obligations under the Commodity Exchange Act. If an introducing broker is not a GIB, and is instead independent, then the FCM's guarantee is limited to safekeeping of customer property. Either way, customer funds and property are fully guaranteed by the FCM.

    I think you were confusing an FCM's guarantee of an introducing broker's obligations, other than return of customer property, with the FCM's guarantee to return customer property, regardless of whether the FCM has guaranteed other obligations of the introducing broker. Have I correctly described your error? Does this also convince you that it is not true that customers of GIBs are treated differently in bankruptcy? Does this also convince you that GIBs are no safer than FCMs?
  6. Absolutely NOT!!

    An FCM guarantees NOTHING regarding customer property. An FCM is merely a trade facilitator... accepting trades and accepting payment or issuing credit for payment of an accepted trade.

    While an FCM has strict rules regarding customer property, as well as exchange imposed funding requirements and rules, the FCM does not have fiduciary responsibility regarding customer property, other than those rules. Customers losing when an FCM fails is parallel to a Money Market fund NAV declining from the expected $1 per share... Can it happen, absolutely; has it been "allowed" to happen, no.

    An interesting link for the REFCO scenario. http://www.futuresindustry.org/fimagazi-1929.asp?a=1093

    As you know, REFCO was a clearing FCM. The important aspect of this is how the "community", including IBs, worked to prevent to minimize catastrophe.

    On the same subject of REFCO, here's a very recent PR... http://biz.yahoo.com/prnews/060630/laf040.html?.v=57

    Read it. Only 40% of customers will have the POTENTIAL to recover 100% of account balances.

    I'm not an alarmist on this subject rockford. But a GIB is safer, safer meaning account holders have more recourse than when account is through a non GIB. And as for self-clearing... If you have thorough knowledge of the GIBs, IBs, exchange deposits, and the specific FCM methods of operation, fine. Regardless however, full recovery has a greater possibility when financial disaster hits a GIB or IB vs. recovery from a failing FCM/self-clear account.

  7. wwx


    Thanks, guys, for your responses.

    I'm still researching the subject. Here's a CFTC letter, originally written in Dec 1999 but apparently updated in March 2006 (for online publication purposes?), explaining the impact on customers when a commodity futures brokerage firm or clearing firm becomes insolvent.
  8. wwx


    No disrespect intended, but this is unrelated to our current discussion, as the pending transaction with Gain concerns Refco FX, an unregulated business.

    In the interest of clarity for fellow ET members, the abbreviation "IB" (in the context of this thread) means "introducing broker," not "Interactive Brokers." This confusion has occurred before in another ET thread.
  9. No problem, and a good catch too :)

    FWIW: NFA membership of RefcoFX as an IB was pending, before being withdrawn 12/24/05. http://www.nfa.futures.org/basicnet/

    Happy 4th,
  10. cscott


    Thanks for opening this discussion. Are you sure about this? It doesn't seem right that trading through an IB(introducing broker), guaranteed or otherwise, would be more secure than trading directly with an FCM, such as Interactivebrokers. An IB(introducing broker) is like an agent or subsidiary of the parent company in my view, and it would appear that going through the main company, the FCM, would be the safest.
    #10     Jul 5, 2006