Futures commission merchants (FCMs) must provide new services and improved capital management to mitigate lower volumes and new rules, while 15% may quit the business, according to new research.
A report by consultancy TABB Group predicts at least a dozen FCMs – 10-15% of current players – will exit the US markets by the end of 2013.
Those which prosper are likely to be larger FCMs able to offer improved execution services and further efficiencies in capital management.
“Technology investment is focused on combining the electronic execution and crossover between the OTC and listed markets with optimal tools that help to manage positions and deal effectively,” the report read.
The last five years have seen a 42% drop in FCM revenues for listed futures in the US. However, next year will mark a significant change in this trend as 65% of interviewees for the TABB study predicted a rise in volumes in 2013.
“In order to succeed, FCMs will need to focus on execution and execution-related services as these will be the areas where they will be able to differentiate themselves from their competition,” said report author Matt Simon, a senior analyst at TABB.
New regulation which is part of the Dodd-Frank Act aims to push a greater portion of the OTC derivatives market through central counterparties to reduce systemic risk and increase transparency. The rules will be implemented on a rolling basis into 2013, but reporting requirements for high-volume swaps users began in October and precipitated a migration of flow from swaps to similarly-structured exchange-traded futures products.
The newly-defined 'swaps dealer' and 'major swaps participant' categories introduced by the Commodity Futures Trading Commission under Dodd-Frank will incur stricter reporting requirements and trading costs for market participants trading large volumes of OTC derivatives. This has forced many to forgo swaps in lieu of exchange-traded futures, and derivatives venues have created new futures products to facilitate this trend.
Even regulators agree the new requirements will create an increased burden on FCMs which must devote more revenue adapting their practices as watchdogs seek tighter restrictions on using client money and increased transparency in light of the failings of MF Global and Peregrine Capital.
“Each time a new rule is enacted, the costs to ensure compliance rise, which is why nearly 90% of the large FCMs say they’re working on improvement projects, internally and in customer-facing parts of their businesses, to compete,” said Simon.
The report, titled ‘US FCM business 2012: The listed part of the equation’, explores the impact of declining volumes and client commission wallets and impending regulatory demands on FCMs.
The report findings are based on interviews conducted in September and October with 15 FCMs. These firms represented $108 billion in client segregated funds, accounting for 70% of the total segregated funds held by FCMs in September.