Bowing to pressure from the Chicago exchanges, the National Futures Association is planning to ease its entry requirements for futures brokers, sources said Tuesday.
The Chicago-based self-regulatory organization has agreed to cut back a key test to encourage securities brokers to peddle financial futures in addition to stocks and bonds.
Backers of the move believe extra brokers will generate more business for two contracts set to be launched this fall: Dow Jones industrial average futures at the Chicago Board of Trade, and mini-Standard & Poor’s 500 futures at the Chicago Mercantile Exchange. Both are aimed at small investors.
Today, registered stockbrokers must pass an additional, 120-question test before they can trade futures.
The “Series III” covers risk, margins, contract design and other basics. The same test is given to would-be futures brokers who haven’t passed the stockbroker exams.
In a meeting Monday evening, exchange officials pressed NFA brass to waive altogether the “Series III” requirement for stockbrokers, but were rebuffed. Instead, NFA representatives agreed to design an abbreviated test, the exchange officials said.
The plan is subject to approval by the NFA board and the Commodity Futures Trading Commission. Neither NFA nor CFTC officials would comment.
Will a mere revision help? Better than nothing, said Merc Chairman Jack Sandner. Added CBOT Chairman Patrick Arbor: “It’s a step in the right direction.”
The change is potentially significant. Today, just 50,000 brokers are qualified to handle futures, while 10 times that many can sell securities, including equity options.
Still, stockbrokers may not care enough about futures to bother with even a simpler test. “Are they interested in taking any additional exam? It’s not a slam dunk,” Sandner said. “The advent of the Dow and mini-S&P may be the catalyst.”
Don’t count on it, said William Brodsky, chairman of the Chicago Board Options Exchange, which is launching a rival Dow options contract that stockbrokers won’t need additional testing to trade.
At most securities firms, few brokers handle both stocks and futures, Brodsky said. The revised test “doesn’t change a lot. It doesn’t mean the firms are going to let them do the (futures) business.”
Others worry the futures test may become too abbreviated. “If you don’t have a high standard, why have it at all?” asked Angelo Calvello, a former Merc official who now heads business development for Analytic TSA Global Asset Management.
“If you can’t demonstrate a certain level of knowledge, you shouldn’t get registered,” said Calvello, who passed the Series III two years ago. “You have to protect the public at least nominally.”
