US FCM Business 2013: Posting Margin, Posting Profits 
 
Author:  Matthew Simon 
Date:   10/9/2013 
Price: US $ 10,000.00 
 
 

US FCM Business 2013: Posting Margin, Posting Profits

Executive Summary
Business conditions for a US futures commission merchant (FCM) can best be described as capital intensive, transformative, and hyper-competitive. Regulation has been the catalyst for ongoing shifts in market structure, with the business environment for FCMs still in limbo as rules are implemented, revised and delayed. Going forward, we will get a clearer picture of whether the investments FCMs are making in systems and services to support trading and clearing of exchange-traded derivatives (ETD) and over the counter (OTC) instruments are going to pay off.

Improved volumes and higher interest rates will contribute to FCM revenue growth and help to validate the investment that has already been made to improve profitability. Futures desks and FCMs providing agency brokerage which have struggled to capture execution business will see better top line growth as investors become more comfortable trading futures as a part of their portfolios. Similarly, FCMs which have had declines in net interest income since quantitative easing began in 2008 will begin to see revenue return.

Certain firms are better prepared to handle changes from rules that call for better functioning and more transparent derivatives markets. Whereby a dichotomy of the FCM business between futures and swaps previously existed, the merging of the two will create new services and choices for clients. For example, FCMs capable of providing clients with tools to manage margin efficiencies and the ability to build out electronic access for executing across different markets and products will have the largest revenue upside.

The largest and most well capitalized firms with sufficient means to access resources and technology can provide best in class solutions for derivatives markets. This is expected to consolidate business to the largest FCMs, with different amounts of potential for others to have success. Meanwhile, the largest firms will face competition from other well capitalized firms that also seek to capitalize on changes in the derivatives business.

Smaller and mid-tier FCMs that focus their efforts on either swaps or futures, but not both, will find limited upside and will be overshadowed by larger firms with more complete offerings. Yet not every player can be ruled out, as any FCM which can provide a unique solution to new challenges can find the potential to succeed. Specifically, innovative business models that alleviate customer concerns can gain market attention as larger FCMs refine their approach and have less flexibility to change infrastructure quickly.

US FCM Business 2013:  Posting Margin, Posting Profits
This report is based on interviews with 16 US-based futures commission merchants. Interviews took place between June and August 2013 with managers of both exchange-traded and OTC business lines. According to the CFTC, as of July 2013 these FCMs represented $117.8 billion in client funds under management, accounting for 74.7% of the $157.7 billion in total segregated funds. While our conversations focused on US derivatives markets, all of the firms we spoke with either support products in other asset classes or participate in markets outside of the US.


 
 
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