Large banks that act as futures commission merchants in the US could struggle to maintain profitability as a swathe of new regulations threaten to reduce the profitability of derivatives trading.
The assessment comes in a new report from consultancy Celent that looks at the new era emerging for firms that provide listed derivatives trading services.
According to the report, despite some tier one firms performing well over the last year, others have struggled with the increased competition and demand of new regulations. The study also noted that some larger dealers were still feeling the effects of the financial crisis, perhaps due to proprietary trading losses.
“The leading FCMs in the US are struggling with falling revenues and profits,” said Anshuman Jaswal, senior analyst at Celent and author of the report. “This puts them in an unenviable position, especially when we consider the overall impact and related costs of various regulatory implementations taking place in the next couple of years.”
However, small- and mid-tier FCMs appear to have performed better than tier one brokers in terms of the revenues they have achieved in recent years.
But the overall environment for FCMs will face further challenges as new rules for trading OTC derivatives contained in the Dodd-Frank Act begin to take hold. The new rules will require swaps to be traded on exchanges or swap execution facilities and centrally cleared. This will give trading venues the opportunity to capitalise with new services, at the expense of brokers.
The report also noted that Basel III, the latest set of standards to ensure banks are adequately capitalised, and the Volcker rule, a restriction of proprietary trading also included in Dodd-Frank, will also affect the profitability of FCMs that operate on a global scale for at least the next three-to-five years.