Futures Commission Merchants (FCMs) have been challenged during the past year by capital constraints and declining margins, creating serious concerns about the future viability of their business models. With US and European regulators pushing forward, profitability conditions have worsened from 2014 and remain in flux in 2015, causing some to exit from the industry.
A study by TABB Group, “The FCM Business 2015: Overcoming Industry Adversity”, reports a ‘revolving door’ effect with both retrenchment and aggressive challengers emerging as a number of established players have had trouble achieving standalone profitability or anything approaching it. Nearly 90% cite regulation, specifically the SLR and G-SIB, as well as capital efficiency (80%) and pricing/margins (80%) as their major concerns over the next 12 months. “These pressures are leading some back to the drawing board”, says TABB Group’s Principal and head of futures research Matt Simon in New York, co-author with London-based research analyst, Radi Khasawneh. According to Khasawneh, “Major reforms are giving pause to where resources and investment need to be made.”
Going forward, TABB believes that a renewed focus on profitability will leave survivors in a good position to benefit from a market upturn as challengers ramp up to capture market share and seek innovative ways to differentiate themselves from the industry goliaths. Simon says, “A noticeable consistency of futures volumes has inspired some to pursue a longer term derivatives franchise investment as a one-stop provider supporting execution and clearing for exchange-traded and overall OTC markets.” He adds that in lieu of no changes to regulatory framework, FCMs will continue to manage their costs down and focus on the most profitable clients.
The authors interviewed both top-tier and up-and-coming FCMs in the first quarter of 2015 to assess the effects of regulation and capital on the economics of the business. Their study covers the shifting competitive landscape for over the counter (OTC) and futures businesses within FCMs; the effect of the increased regulatory burden and capital calculations on business models; trends in client flows by region and the future shape of the market; the changing approach to costs, technology and internal benchmarking; and evolution of pricing models and the effect of the market environment on profitability.