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.
To read this an other recent blog posts follow this link to my managed futures blog (requires free registration): http://www.uncorrelatedinvestments.com/blog/?p=45
Mark Melin is author of High Performance Managed Futures (Wiley 2010), Co-Editor of The CBOT’s Guide to Futures and Options and taught a managed futures course for Northwestern University’s Executive Education Program.