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Direct clearing in futures trading is reshaping role of FCMs, says TABB Group

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Exchanges are recognising the changing futures commission merchant (FCM) landscape and are willing to look to new and innovative ways to serve their client base, according to a report by TABB Group.

The CME Group is the latest to propose a direct clearing option for its end users as Direct Funding Participant (DFP) members, following the similar ISA Direct initiative launched by Eurex Group earlier this year.
Tom Lehrkinder, author of Clearing House Calculus II: Exchanges Expand the Boundaries of Self Clearing, explains futures clearing has reached an inflection point that has forced exchanges and clearing houses to take notice.
The number of US FCMs has fallen from 154 in 2008 to 70 in May 2016 and though FCM numbers have been declining, they remain an integral part of the trading and settlement process. Both the CME and Eurex have taken steps to ensure that the FCMs are still available to cover any contingent liability that these new membership categories may introduce.   
“For the CME to even consider a new membership category speaks volumes to how the marketplace is changing and reacting to the regulatory influences of today,” says Lehrkinder (pictured). “Although the now intertwined relationship between exchanges, FCMs and end users has made a dramatic shift in clearing structure, exchanges and clearinghouses still need the security blanket of the FCM to provide stability and financial backing.”
According to the research there are a number of benefits to this new market structure, most notably that direct access may lead to reduced processing and settlement risk in futures markets as clearing houses assume a direct role in clearing futures transactions.
Taking into consideration the challenging environment facing the FCM industry, TABB concludes it may only be a matter of time before DFPs are on level footing with sell-side market participants as the margining and settlement side of the business further evolves.

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