FCM client clearing numbers in steep decline

Latest CFTC data shows a major drop in the number of US futures commission merchants offering services to the buy-side.

The number of futures commission merchants (FCMs) clearing for customers in the US is set to drop to just 54, a huge decline from pre-crisis levels. 

Recent data from the Commodities Futures Trading Commission (CFTC) shows 55 active customer clearing brokers in the US, though one more name now needs to be struck off the list.

The National Futures Association barred X-Change Financial Access (XFA) from operating as an FCM, bringing the number down to 54. 

The NFA found that “XFA's risk management policy failed to adequately address all risk areas, including capital risk”.

It subsequently banned XFA from operating as an FCM and landed the firm with a $75,000 fine.

One of the more recent high profile firms to pull away from offering clearing services was Jefferies, which sold its client activities under Bache to Societe Generale.

According to the CFTC report, the Jefferies FCM had been completely wound down with no customer assets in segregation. 

The drop-off in FCM numbers began 10 years ago, but has accelerated in recent years. Two more dropped out between Q2 and Q3 this year.

There were 154 FCMs in operation pre-financial crisis, with the numbers in 2005 even higher at 190.

“The global financial crisis resulted in an extended period of low rates and concentration of client funds, eroding both the interest rate and transaction commission elements of the FCM business model," said Steve Woodyatt, CEO, Object Trading.

"The number of cards in the FCM deck have not only been reduced but reshuffled.  There are fewer bank FCMs providing a single resource for the full range of client clearing, capital, funding and lending services.  

"But comprehensive market coverage isn’t easily attainable for the buy-side in either case." 

Capital requirements facing banks and declining margins and profitability in the FCM business has seen many big names pull away from the service. In Europe, firms including Nomura, BNY Mellon and RBS have also left the client clearing business.

As a result there has also been a consolidation with the top 10 FCMs. According to data from TABB Group, 75% of account balances at the end of Q3 were with the top 10 firms, while 36% were with Goldman Sachs, JP Morgan and Societe Generale.