The Outlook for Derivatives: Futurization, FCMs, and Technology

Author(s):
Andy Nybo, Matthew Simon
Date:
June 12, 2013
Research Type:
Focus Note
Executive Summary

Since the introduction of the Dodd-Frank Act in July 2010, there have been significant pressures applied across the derivatives markets to develop services and solutions for unknown market opportunities. Dragging a highly profitable, opaque, over-the-counter (OTC) derivatives industry into an exchange-traded, centrally-cleared and trade reported world has been especially daunting for exchanges, brokers, and technology providers. Panelists from various areas gathered to discuss these themes at the TABB Inaugural Derivatives Conference on May 21, 2013 in Chicago.

Over the course of discussion, there was agreement that momentum is shifting and more focus is being placed on developing faster, more nimble technology along with innovation. The launching of new products, such as swap-futures, provide new ways to deploy capital and manage risks. In this regard, the regulatory changes have been a catalyst to significant market structure change and improvements for end users over the long term.

In addition, panelists maintained a cautiously optimistic attitude for the brokerage industry. Futures commission merchants (FCM) profits are considered to increase in the long-term, but questions arise for the near-term sustainablity of the FCM business in an environment that continues to include increasing operational and technology costs. Instead, regulatory changes must subside in order to refocus on revenue-driving activities. Meanwhile, rate increases for end users are to be expected, as high fixed-costs and low profit margins must reverse, or FCMs will be forced to exit the industry.

Lastly, panelists perceived the recent technology failures in financial markets as no more frequent an occurrence than what has happened in other non-financial markets, seemingly with less attention from the media and regulators. The limited number of technology disruptions that have occurred in financial markets should be applauded rather than demonized as a symptom of underlying technological deficiencies. However, the degree of complexity and the need for technology to support constant change are creating challenges for the entire industry.

Thus, participating in the derivatives markets today include measuring opportunities against eventual outcomes created by new rules of the land. The added complexity of markets provides numerous ways to profit, but also poses significant risk for service and solution providers when innovation outpaces solutions created. In order to combat running in place, firms must continue to evaluate futurization, FCM business models, and technology automation as critical elements of their business planning initiatives.

Areas of Interest
  • Derivatives
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