Almost two-thirds of futures commissions merchants (FCMs) expect to expand their number of clearing houses over the next three years, a recent study from Acuiti has found.
Published in partnership with ION, the research report, entitled ‘The Growing Opportunity in Derivatives Clearing’, explores the impact that rising rates will have on competition for FCMs.
Also considered is the potential for an increase in providers as conditions improve. Rising interest rates over the past year and market volume increases have respectively created the potential for additional revenue and a dual tailwind for FCMs, the report states. Less than 10 per cent of those polled predicted that interest rates would not remain high for long enough for them to confidently expand their business.
Over the past decade, low interest rates and volumes have had detrimental effects on FCMs’ revenues. As a result, between 2008 and 2023 the number of FCMs has dropped from approximately 170 to 70.
Acuiti expects this trend to reverse in response to new cryptoasset and retail market entrants looking to expand their offerings through clearing memberships. However, it highlights that capital charges, talent acquisition, technology sourcing and regulatory compliance remain barriers to entry.
Acuiti’s survey consisted of 61 senior executives from firms including FCMs, Tier 1 and 2 banks and regional banks.
Francesco Margini, chief product officer for cleared derivatives at ION Markets, says: “The radical evolution of the clearing landscape has made real-time systems and back-office functionality all the more critical for the growing FCM community. At ION, this new demand is evident across our customers.
“We see it as a mission for technology providers to resolve the costly, complex deployment challenges new entrants face when modernising their post-trade infrastructure. Rather than being a barrier, technology solutions should reduce vital overhead for businesses and enable them to seize opportunities in a competitive and volatile environment.”
Ross Lancaster, head of research at Acuiti, adds: “There has been a significant and abrupt change in the economies of providing clearing services in derivatives markets over the past decade. This is resulting in existing FCMs seeking to expand their offerings, and new entrants eyeing launches. The market needs more FCMs, and the continuation of the current conditions is likely to reverse the long-term declines in the number of firms providing services to the market.”
Jerome Kemp, president of Baton Systems, states: “Higher interest rates clearly present an enhanced revenue generating opportunity for FCMs but also add operational challenges to the margining process. With the cost of funds no longer being close to zero, higher rates have shone a light on the need for FCMs to optimise the mix of cash and non-cash they post to satisfy margin requirements across their CCP memberships. Manual processes, poor visibility of the data that ultimately drives economically intelligent decisions, and the inability to quickly mobilise and move both cash and securities carry an opportunity cost that FCMs should be addressing.
"An FCM seeking to extend its CCP relationships should be seriously considering the steps it needs to take to better access, aggregate, normalise and optimise real-time data across the universe of its memberships. Without this, an FCM will find itself exceptionally challenged to derive greater value from its treasury operations."
