US FCM Business 2012: The Listed Part of the Equation

Executive Summary
The competitive landscape for futures commission merchants (FCMs) is changing from a model where investment and interest rate income are no longer the keys to profitability. Going forward, FCMs that provide investors with cutting-edge execution technology, efficient ways to manage and deploy capital, and outstanding customer service will retain existing clients and improve their ability to earn more in the long run.

The push to move over-the-counter (OTC) products onto exchanges and clear them through central clearing parties (CCPs) is a primary catalyst of large global banks’ interest in the futures markets. At the same time, new rules from the US Commodity Futures Trading Commission (CFTC) are putting pressure on FCMs traditional business model. After MF Global and Peregrine Capital, FCMs that manage customer assets are governed by more controls with fewer upside opportunities.

In the interim, we are bearing witness to a structural shift in the FCM business model. The traditional futures business is undergoing significant change due to rising operating costs occurring in a significantly weaker revenue environment. But there is good news: The landscape is changing in favor of FCMs that offer a suite of comprehensive trading and clearing services using a best-in-class approach.

As competition heats up and markets become more complex, developing technology – including risk management, execution algorithms, and transaction cost analysis (TCA) – involves rising costs for FCMs. As customers seek out large counterparties with a robust set of systems, technology investment is focused on combining the electronic execution and cross-over between the OTC and listed markets with optimal tools that help to manage positions and deal effectively.

The ability of FCMs to differentiate themselves will be based on how they approach stricter rules and constant change. For example, safety and security of assets is top of mind for FCM customers that may consider new operating models that challenge the traditional model. In this regard, the mindset for reevaluating existing relationships will present greater opportunities for different firms and new ideas.

US FCM Business 2012: The Listed Part of the Equation
TABB Group spoke with 15 futures commission merchants (FCMs) based in the U.S. These interviews were conducted during September and October 2012. According to the CFTC, as of September 2012 these FCMs represented $108 billion in client funds under management, accounting for 70% of the total $155.1 billion in total segregated funds. We included in our conversations the cumulative impact of declining volumes and commission wallets; challenges of running an FCM business including regulatory change; the impact of FCM failures; IT and staffing budgets; views on handling and oversight of customer funds; and expected winners and losers of the FCM landscape.