With Valentine's Day this week, I wanted to send some love and respect to all the FCMs that are FIA members. These firms are tremendously important to vibrant and safe cleared derivatives markets, and the global economy as a whole. They connect customers to our markets – particularly commercial end-users and hedgers – to provide liquidity and assist with price discovery.
As intermediaries, they also do us all the tremendous service of reducing risk for everyone. Beyond the obvious benefit of helping end-users like agricultural firms and oil producers effectively manage specific business risks through access to futures products and education, the collateral they hold for customers protects against losses and defaults. That reduces systemic risks to the industry as a whole.
FCMs are an integral part of clearing system because they are risk managers, not risk takers. They guarantee all trades and stand behind their customers with their own capital and balance sheets – expanding access to derivatives markets and ensuring risk is not directly and wholly shouldered by the derivatives clearinghouses themselves.
Particularly in an era where decentralized finance or "DeFi" is all the rage, we should remember that FCMs are the original DeFi as these clearing members disperse and mutualize risk across many well-capitalized firms. These firms provide an important shock absorber for businesses large and small that have been forced to respond to rising interest rates, spikes in commodity prices, and other types of market risk . FIA is proud to support all our FCM member firms for the important role they play in derivatives markets.
Challenges facing FCMs
According to the latest FIA FCM Tracker data, the total amount of customer funds in futures accounts at US futures commission merchants hit an all-time high of $324.5 billion in December, topping the previous record set in March 2020. This increase in customer funds sends a powerful message about the tremendous value that futures markets provide to customers, but comes alongside a more sobering statistic.
Namely, that these customer funds are held by only 47 FCMs registered entities – less than half the figure from 10 years ago.
Global futures and options markets are thriving, but FIA knows that it isn't easy to be in the FCM business these days. Just some of the challenges they face include:
Regulatory burdens: The cost of compliance and regulatory restrictions has grown substantially for FCMs in recent years. The big push began around 2010 with Dodd-Frank reforms in the wake of the financial crisis but has continued even in more recent years.
Capital requirements: The minimum net capital requirements for this community can be incredibly burdensome, which has caused some banks to pull out of the client clearing business. .
Inefficiency and fragmentation: FCMs still shoulder much of the costs as they compete for business in a chronically low-margin business. Linking pre-trade and post-trade workflows in an era of outsourced technology and multiple vendors also adds complexity to the business model.
We are committed to helping FCMs on these fronts, and others. FIA continues to work with global policymakers on capital issues and with intentions of reducing regulatory complexity and the cost of compliance. Additionally, FIA launched an industry-led standards initiative to help increase efficiency and interoperability in our markets. This could be particularly meaningful for FCMs that don't have much margin for error, cutting down the cost of doing business incurred by fragmented operations and technology solutions.
As anyone in this business knows, relationships matter. And FCMs are an integral part of the clearing system because of their ability to support liquidity and reduce risk, to the benefit of everyone.
FIA is committed to working hard on behalf of these important market participants and will continue to partner with regulators and industry leaders to create a more favorable environment for these firms in 2022 and beyond. Even though FCMs sometimes get overshadowed by larger organizations in our industry or fast-moving tech firms, they deserve much love and respect for all they do for the global cleared derivatives industry.
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