FCMs to Exit Market

Terry Flanagan

Futures commission merchants are exiting the market due to the cost of complying with new regulations according to a panel at the International Derivatives Expo in London.

Jerome Kemp, global head of Citi Futures, clearing and collateral, at Citigroup Global Markets said at IDX that in 2004 there were 178 regional FCMs in the US but that number had dropped by half. As a result 75% of client segregated funds are now held by the 10 largest FCMs.

Andrew Ross, European head of OTC clearing at Morgan Stanley, said: “It started as a trickle but we are seeing a greater flow of FCMs leaving the business. Morgan Stanley is absolutely committed to clearing but the pendulum has swung so far that unless you have a strong position the business will not remain viable.”

Nicholas Forgan, co-head derivatives clearing at JP Morgan, said: “There are troubling signs that over the next two to three months, a number of FCMs will be exiting the business.”

M Ramaswami, president of the Singapore Exchange was more optimistic. He said FCMs would have to change their business models and reprice their services but would emerge as stronger businesses.

“Once volatility returns customers will discover the dangers of not hedging and that will drive a willingness to pay higher fees,” added Ramaswami.

Chris Topple, global head of prime clearing services at Newedge, the global agency broker and clearing firm owned by French bank Societe Generale, said FCMs need scale to survive. Topple said: “Our FCM has been combined into a separate unit within the investment bank to act as a point of aggregation for margin and collateral across asset classes. It has been a big change for us.”

Ross said Morgan Stanley was changing its clearing business in a similar war to Newedge.

“The industry is a third of the way through innovation,” Ross added. “We will see the development of swap execution facilities in Europe and new products such as deliverable swap futures. There will be an evolution in product development to make trading more capital efficient.”

In another panel at IDX Jeffrey Sprecher, chairman and chief executive of IntercontinentalExchange, warned that MiFID II, the revised Markets in Financial Instruments Directive governing trading in the European Union, will not create competition amongst clearers. He said the new rules favour exchanges operating a vertical business model and owning their own clearing houses.

Sprecher said: “The legislation will lead to a small number of clearing houses with highly concentrated positions. I can’t see any other outcome and this bodes well for incumbents.”

MiFID II had been expected to mandate open access to clearing but provisions in the legislation allows national regulators to delay competition by up to five years if their exchanges operate vertical silos.

Phupinder Gill, chief executive of CME Group, said he was unsure how open access could be implemented and warned it would have a tremendous impact on the ability of exchanges to innovate.

However Robert Greifeld, chief executive of Nasdaq OMX, argued that MiFID II would usher in a new era of competition amongst clearers. Greifeld said: “Customers are excited about open access and the impact on clearing will be analogous to MiFID on trading.”

Garry Jones, chief executive of the London Metal Exchange and co-head of global markets, Hong Kong Exchanges and Clearing said the LME is launching a new clearing house by September.

“The new clearing house has been built form scratch and so is light years ahead of what we had before,” Jones added.

Featured image via Naeblys/Dollar Photo Club

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