FCM Data – April 2015

By now you know the drill: CFTC publishes FCM data from the FCM 1FR reports, or from the broker/dealer FOCUS reports, every month. Every once in a while I download the CFTC report from here and re-sort the report by Customer Segregated Funds Required (Column J).

The report sorted by Customer Seg Req’d is here.

In July, 2014, the total Customer Seg reported by FCMs was $148,214,002,848.

In April, 2015 the total was $149,913,404,903, up a little bit.

The top five FCMs carry 51% of the Customer Seg, those FCMs are Goldman, JP Morgan, SocGen (formerly Newedge), Merrill Lynch and Morgan Stanley.

Add in the next five FCMs are the top-10 carry 74% of the Customer Seg balances. Rounding out the top-10 are Credit Suisse, UBS, Citi, Barclays, RJ O’Brien.

23 FCMs carry more than a billion dollars in Customer Seg, ranging from Goldman ($22B) at the high-end, to the winding down Jeffereis at the low end (just under $1.5B).

Just 57 FCMs reported any Customer Seg balances at all. That’s down six from just last July. And it is down more than 40% in the past 10 years.

I spoke about this a little more than a year ago at the FTF Derivops Conference in Chicago. At year-end 2003, 177 FCMs submitted FOCUS/1FR reports to CFTC. Ten years later, at year-end 2013, just 102 did. By April 2015, that number had dwindled to just 75.

At year-end 2003, 102 FCMs reported to CFTC that they cleared customer business (Customer Seg balances) At year-end 2013, just 69 did. By April 2015, that number had dwindled to just 57.

These are awful numbers, it is an awful trend.

What are your thoughts?

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4 Responses to “FCM Data – April 2015”

  1. Scott Mehlman Says:

    Hi John,

    The acceleration of decline in the FCM community should not have been hard to predict!

    After the Great recession our Congress enacted the ‘Restoring American Financial Stability Act of 2010’, better know as Dodd Frank.

    On top of the normal tendency for consolidation in mature industries, this legislation, while well intentioned, was not well thought out. Political solutions to Financial and Economic problems seldom are!

    The act mandated several things, but these mandates (again as well intentioned as they might be) did not take into account the real world implications of implementing these mandates. And those implications, from a business perspective were in increasing the costs of compliance. We have seen this effect in several ways and not just in the FCM community.

    JP Morgan and Morgan Stanley (and others) have shed Physical Commodity businesses in order to avoid the high costs of reporting and remaining compliant. It is hard to understand how these profitable businesses could not have remained profitable but there sale, in and of itself, proves this point.

    On the FCM side, the cost of compliance in terms of reporting for both Dodd Frank and Emir is excessive. In addition, the competition in the Clearing space has driven down prices even while volumes have steadily increased at least through last year. Couple all that with the end of the so called Super Cycle in Commodities and it is not hard to understand why the trend you so elegantly point out continues.

    A better question to ask is what can be done to reverse this trend.

    Here are some things that I think need to happen in no particular order.

    1) The cost of reporting and complying with the DF regulations needs to be reduced dramatically. To do this, I believe Technology will need to be deployed in a central way. Perhaps even by an industry organization such as the FIA. Or perhaps a consortium of FCM’s directly.

    2) The regulation itself will need to be modified so that compliance becomes less expensive.

    3) The cost to Clear will need to be stabilized and a way needs to be found to raise those rates. The reduction of FCM’s should actually help that. The laws of Supply and Demand should start to kick in.

    4) New products will need to be deployed by the exchanges in close consultation with their customers in order to continue the growth in Volumes needed to support new FCM’s.

    As you point out while the number of FCM’s has declined the aggregate amount of Seg. funds has actually slightly increased. This has to do with the ability of the larger houses to ‘Scale’ there platforms to handle ever larger volumes.

    In conclusion, the trend is not good but it does not necessarily foretell a dying industry. To the contrary, I believe that the industry is quite healthy and will grow. However the growth in absolute volumes of Transactions may not lead to more Clearing firms as the ability of the larger houses to Scale will naturally make the cost of entry prohibitive.

    Scott Mehlman

  2. Steve Auerbach Says:

    Thank you for providing the report. I noticed the top ten FCMs in Customer Seg make up 73.7% of the total. I do not recall the top ten being this substantial in the past. [Hint… it would be great if you could look that up…. Hint]

    That said, Scott Mehlman’s explanation is well thought out. To summarize, the costs of being an FCM are so high that it is not a viable business strategy for many firms. Between regulation and clearing /exchange costs, the business model for FCMs is difficult to manage.

  3. John P. Needham Says:

    The truth is, Steve, that the percentage of US Customer Seg funds held by the top-10 FCMs has remained relatively stable, consistently over 70%, for years. I looked back and previous blog posts going back to 2011 and the same thing was true.

    May 2013 it was 75%: https://needhamconsulting.net/2013/07/16/new-cftc-fcm-data-released-may-2013/

    September 2012 it was 77%: https://needhamconsulting.net/2012/11/13/cftc-fcm-data-report-for-september-released/

    June 2011 it was 76%: https://needhamconsulting.net/2011/08/11/cftc-releases-fcm-data-for-june-2011/

  4. John P. Needham Says:

    And Scott, thanks a bunch for the eloquent comment. Something must be done, that’s for sure, and I agree that technology will be a big part of the solution.

    But in the meantime, I worry that too many FCMs will be lost, and that will negatively impact the industry. Lots of genuine hedgers – ranchers, farmers, feed-lot operators, energy consumers, food producers, etc. could wind up on the outside – with no place to clear their business, except at higher costs. When that happens, everything Americans eat, all the energy we use, everything we do in our day-to-day lives, will be more expensive.

    I’m inclined to agree that some modifications to the regulations are in order. But I’d argue that the rules should probably be applied differently to smaller FCMs than to larger ones.

    I often make the point: a regulation that applies to JP Morgan the same way it applies to McVean, or a rule that applies the same to Goldman as it does to Dorman…well, that rule probably is pretty stupid.

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