Futures commission merchants (FCMs) will need to make considerable changes to their business models in order to meet the challenges of incoming derivatives regulation, according to a white paper from market technology firm Fidessa.
It said many FCMs have business models that are based on old market structure and are reliant on being able to simply intermediate between clients and liquidty, or are hoping for a return to high interest rates.
However, the move to multi-lateral trading and central clearing in swaps means these old business models will not work in the future, according to Fidessa’s director of group strategy, Steve Grob.
“Waiting for markets to return to ‘normal’ is not an option,” he said. “The fundamental challenge for the FCM is how to create a business model that lowers cost but remains flexible enough to take advantage of all this change.”
Among the biggest issues for FCMs is to marshal their costs, according to the white paper.
Currently, many have multiple internal and external systems, which do similar things due to a rush to win clearing mandates in the past. FCMs also run multiple desks with different trading application, which can add significant expense.
To deal with these issues, Grob said FCMs should look at how they implement technology to improve workflows. Resilient, high-performance back-bones that centralise functions while leaving enough flexibility to meet clients needs should be a priority for firms looking to adapt.
FCMs should also ensure they understand their IP and look to outsource areas which don’t give them a competitive advantage.
Implementing a seamless workflow across asset classes and desks will also be essential to competing once the many regional reforms to derivatives trading have been completed.
“Technology in and of itself is not necessarily the answer; a multitude of different systems creates too many joins that drive up cost and inhibit freedom to respond to change,” said Grob. “Instead, a workflow approach that provides a single centralised spine connecting the different parts of the firm together provides the only really workable solution.”