Banks to finally turn a profit from derivatives clearing, finds research

Research from TABB Group estimates FCMs could record around $4.5 billion in 2016 from derivatives clearing.

Banks could finally see a profit from derivatives clearing following years of increased capital costs and balance sheet constraints, according to research from TABB Group.

According to the research , which interviewed managers at the top 10 US future commission merchants (FCMs), banks could see around $4.5 billion in revenue available from derivatives clearing in 2016, up 5% from 2015.

“FCMs have been treading water since the end of the financial crisis, but the sense from leaders of the community is that they have weathered the storm and the business will rise over time,” says Tom Lehrkinder, senior analyst and author of the TABB report.

Latest FCM data from the Commodity Futures Trading Commission (CFTC) indicated client segregated collateral has increased significantly among the main clearing banks, with Morgan Stanley leading the way as the top swaps clearer, followed by Citigroup and Credit Suisse.

Banks have dealt with years of constant pressure from new regulation, capital rules, and a challenging interest rate environment, all of which have affected profits.

As a result, some banks have pulled away from the business completely, including BNY Mellon, Nomura, RBS and State Street.

The research from TABB Group, however, indicates banks are now about to turn a corner, in which 73% of respondents said their firm is either ahead (50%) or on pace (23%) with the necessary procedures to handle the regulation.

“During our outreach we found that FCMs have spent a lot of time explaining to clients where they use commission dollars to support the business, which shows us that profitability is not what it used to be,” adds Lehrkinder.

“FCMs have taken steps to manage mounting capital charges and their balance sheet, with some going so far as to de-recognise client funds from their balance sheet and in turn forfeiting the ability to earn an interest spread on the balances.”

Europe’s FCM community may also see a return to profits, following the European Commission’s proposal to ease the impact of the leverage ratio on derivatives clearing and allowing an offset for client collateral when calculating exposures.