The Tabb Group, a financial markets research and advisory firm headquartered in Westborough, Massachusetts, released a report last week entitled “FCM Business 2015: Trends Realities and the New Glory Days.” Based on discussions with representatives of 15 of the top future commission merchants, the report seeks to identify current priorities of FCMs as well as potential opportunities. Despite the number of FCMs shrinking from 154 to 74 from December 2007 to December 2014, the Tabb Group is optimistic about the prospects for FCMs. According to its report, “[g]oing forward, there is significant opportunity for FCMs to grow their business and profit.” Tabb Group’s report does not provide a clear blueprint for success, but it does recognize that there are different opportunities for top tier global players and so-called “second tier” FCMs. While the biggest firms will be able to meet the expectations of their clients by providing “services for product execution and clearing across multiple assets classes (including exchange-traded and over-the-counter derivatives) as well as providing connectivity to global markets,” smaller FCMs can compete by providing outstanding client service, credit-ratings, technology and operations. There is even a place for new players, says the Tabb Group: “[t]hese FCMs will gain traction by ensuring trades are cost effective, processed correctly, and performed with appropriate risk controls. Similarly these same FCMs must be able [to] differentiate their offerings by providing new services to win over larger institutional customers.”
Helpful to Getting the Business Done: The FCM business model is demonstrably under attack because of the high costs of capital and regulation, and the obligations of clearing brokers for other clearing member defaults at clearinghouses. However, for years, too many FCMs stopped listening to clients and provided an inferior product offering. They concentrated almost exclusively on saving costs. As a result, they outsourced far too much technology and were left with an undifferentiated front-end and back-end platform that was essentially the same from firm to firm. FCMs were forced to compete on the promise of “best customer service,” which in fact was a hollow promise and really meant competing by offering uneconomical rates. Moreover, some firms took their eyes off risk management, mistakenly thinking FCMs principally had to consider their clients’ credit risk, and not the market risk of their positions. Tabb Group is correct that there is a viable future for FCMs. However, it will require each FCM to assess what it can do best and leverage its unique strengths to serve particularized client bases. An FCM should provide a technology platform that is reliable and capable of differentiation and try to address clients’ new evolving needs (e.g., collateral management services and more compliance support). Costs must continue to be controlled and risk systems enhanced, especially those tracking intraday exposures and the liquidity of client positions. Moreover, charges to clients must be set at levels that are fair to both the FCM and the clients. FCMs should not be basing their future on a return of higher interest rates—they are brokers not banks! And don’t forget the long-term benefit of maintaining a robust compliance culture! By implementing these and many of the common sense recommendations of the Tabb Group report, FCMs can return to viability and even acceptable levels of profit. It’s not just doom and gloom!