Top FCMs Will Grow Larger in 2014, Says Tabb Group

OTC derivatives reform is likely to lead to growth for the largest U.S. futures comminsion merchants (FCMs), according to research from Tabb Group.

The survey polled 16 U.S.-based FCMs with managers of both exchange-traded and OTC businesses, totaling $117.8 billion in client funds under management. While FCMs are “capital intensive, transformative and hyper-competitive,” says the report, new regulatory requirements for trading and clearing derivatives means that the largest FCMs will be the ones who can keep up with demands, and thus will see growth in their business.

“As the new market reforms take hold,” says TABB senior research analyst Matt Simon “The large investment that many firms have made towards building out their FCM will prove fruitful as derivatives markets evolve and converge. As a result, we see business likely to consolidate within the leading U.S.-based FCMs that have sufficient means to access resources and technology and deliver best-in-class solutions.”

Overall, Tabb estimates overall revenues for U.S.-based FCMs will increase by 15% next year, as a result of better market conditions. Specifically, the futurization of swaps is expected to improve; 80% of those surveyed think swap future volumes will increase by the end of 2014, and thus FCMs are investing in improving their execution and clearing capabilities.

As clearing becomes more regulated, FCMs are planning to increase fees in 2014 to add revenue, but the size of the increase will be determined once different regulations regarding capital requirements are finalized, as well as depending on the industry’s acceptance of fee increases. FCMs say they are working on being more transparent on pricing, and are also investing in new technology to bridge the gap between swaps and futures through cross-product margining tools and reporting solutions.

“Going forward, we’ll get a clearer picture of whether the investments FCMs are making in systems and services to support trading and clearing of exchange-traded derivatives and over-the-counter instruments will pay off,” says Simon.