FCM Business 2015: Trends, Realities, and the New Glory Days

The traditional futures commission merchant (FCM) business model has been under tremendous pressure to reinvent itself since the financial crisis of 2008. New regulations, higher operational costs, and client pressure for new services at lower costs have all put strains on profitability. Further, quantitative easing – lasting longer than many had originally expected – has meant interest revenue from portfolio balances is no longer enough to offset many of the higher costs associated with running the business. These variables (in conjunction with M&A activity and financial malfeasance) has forced many once leading firms out of the business.

Going forward, there are new opportunities to explore, albeit with fewer FCMs remaining to share the potential revenue pie. With each FCM taking its own distinct approach, evolution of the industry will result in less competition per segment. Further, the industry survivors must adapt and continue to invest in order to succeed. This cost will not be acceptable for everyone, as capital requirements increase and the power of the balance sheet and client mix become the overriding factors to claiming success.

Pressure is mounting on small and mid-tier FCMs to compete effectively. Top-tier FCMs eager to capture new business are raising the bar, and the costs of remaining competitive are increasing faster than revenue opportunities, even as futurization takes hold. The economics of the business, including technology, personnel to support OTC clearing, global reach, and new capital requirements all are going to challenge non-bank FCMs and futures-only firms. Along with a strong technology backbone, it will remain important to define good customer service, product expertise, and cost.

Despite the challenges faced in the OTC market in general and by FCMs specifically, it is clear that the focus of innovation is still on niche services that clients cannot replicate. Analytics and portfolio optimization are seen as key areas by those that clear in size. A spike in cleared volumes and a renewed focus on the importance of managing collateral and financing costs will help this process.

Lastly, market conditions are improving and FCMs committed to the business will have the opportunity to benefit as net interest income begins to improve and futures volumes see further growth. It is expected that the large investment many firms have made towards building out their FCM business for exchange-traded and OTC derivatives will prove fruitful as markets evolve and converge. Demand for futures will increase as regulations make it more costly and difficult to trade in OTC markets. In this regard, certain FCMs are better prepared to handle changes from rules that call for better functioning and more transparent derivatives markets.