The US future commission merchant (FCM) community has been under constant pressure for the last eight years from new regulation, stifling capital rules, declining number of players, a challenging interest rate environment and increasing costs that are all adversely affecting profitability.
Despite this wave of challenges, TABB Group’s latest research, “The Tide is Rising for US FCMs: US FCM 2016,” finds leaders of the FCM community are finally spinning a positive outlook for the industry.
Report author Tom Lehrkinder (pictured) explains that regulation is the incumbent top challenge for the last three TABB FCM studies sampled, but this year 73 per cent of respondents say their firm is either ahead (50 per cent) or on pace (23 per cent) with the necessary procedures to handle the wave of regulation.
Meanwhile, profitability has become a challenge that has led to the resizing of the FCM community; close to 70 per cent of the respondents TABB spoke with recognise that managing a profitable FCM business is a big challenge, if not the biggest along with regulation, difficulty growing the business and increased cost of capital.
“During our outreach we found that FCMs have spent a lot of time explaining to clients where they use commission dollars to support the business, which shows us that profitability is not what it used to be,” says Lehrkinder. “FCMs have taken steps to manage mounting capital charges and their balance sheet, with some going so far as to de-recognize client funds from their balance sheet and in turn forfeiting the ability to earn an interest spread on the balances.”
Lehrkinder also reviews how trading platforms and the vendor landscape has changed as regulations continue to drive up technology costs. Though third party vendors are becoming more ingrained in FCM IT plans, he explains there is still a need to integrate with proprietarily built platforms. There is still a place for human touch and the intellectual backstop that clients require. Throughout the ups and downs of the FCM business, client service is still perceived as the single most important factor differentiating service provided by FCMs.
“FCMs have been treading water since the end of the financial crisis, but the sense from leaders of the community is that they have weathered the storm and the business will rise over time. In fact, TABB estimates 2016 revenue available for the US FCMs will be up five percent over 2015,” says Lehrkinder.
For its 2016 US FCM study, TABB interviewed business leaders who are specifically responsible for managing the FCMs and driving the futures industry forward, including managers at nine of the top 10 FCMs in terms of client segregated assets, as well as seven additional FCMs.
