FCMs target ‘specialised’ business models

With buy-side clients taking on multiple brokers for execution and clearing, FCMs will have to become specialist service providers.

Banks offering derivatives services will have to adapt their business to become specialised in certain areas, in order to fit with clients adopting multi-broker models.

Banks are being required to adapt to a changing clientele which is taking larger steps towards full electronic execution. Buy-side demands are becoming more complex, and banks and prime brokers operating a clearing business are becoming increasingly selective in the clients they serve which will fit their strategy.

 “If you are servicing quants you need to be able to provide services like sponsored access, low latency and co-location services. So you need certain dedicated products that fit to the business models of those clients,” said Gildas Le Truet, global director prime clearing, ABN Amro Clearing.

“We know we can make a difference for strategies like index arbitrage, statistical arbitrage, equity market neutral, liquidity producers, and high frequency trading… and help them generating performance. We are all becoming specialised prime brokers.

With banks shifting to become specialised service providers, buy-side clients are realising they need to adopt multiple brokers, with each one providing separate services in areas such as direct market access and algorithmic trading.

“Having one clearing broker is not the answer for those with a directional hedging strategy; they will have to start diversifying. Adding more clearing brokers will ensure they have bandwidth to continue their operations and avoid credit lines,” said Nick Chaudhry, head of derivatives execution and clearing services, Commerzbank.

“Even for a relatively small client over the next 10 to 30 years, they will need additional requirements from their clearing brokers, and that message is resonating.”

FCMs are also looking to become specialised in optimisation services in terms of clearing processes, counterparty management, collateral and cash management.

Clearing banks will be expected to provide services such as cross-margining and compression to provide efficiencies to their clients.

“The next major change in clearing is moving from the traditional role of marshalling flows between ourselves, clients and CCPs, to a much keener focus on optimising those flows,” said Jerome Kemp, global head of futures, clearing and collateral management, Citi.

“Being able to leverage what is on offer for, the CCP to net across futures and swaps, but also developing our own ability to help clients optimise margin, collateral and the use of CCPs.”

For the full article on the future of client clearing, look out for the latest issue of The TRADE Derivatives.