NEW YORK & LONDON--(BUSINESS WIRE)--Future Commission Merchants (FCMs) have significant concerns about the future of the market. Those that offer over-the-counter (OTC) clearing services have told TABB Group that they are at a crossroads because fees and volumes have disappointed, given the additional complexity of OTC contracts versus the equivalent in futures.
Tension is high in the over-the-counter derivatives clearing business as firms are facing challenges in profitability, say TABB research analysts Radi Khasawneh in London and Colby Jenkins in New York, co-authors of “OTC FCM Business 2014: Momentum Stalls and Challenges Emerge.” This has driven the FCMs to renegotiate fee schedules, having low-balled themselves in the years since setting up the OTC business. Meanwhile, clients are looking at value derived from add-on services and technology.
According to TABB, the standard fee structure has moved from straight transaction and maintenance fees to incorporate the additional margin required for OTC contracts. “As many as 54% of the FCM firms,” says Khasawneh, “have now added a basis point fee for initial margin requirements. Beyond that, there’s little consensus concerning which part of the fee structure contributes the most to revenues and as a result the revenue outlook remains murky. However, although several FCMs indicated their businesses were profitable on a standalone basis, individual views about the overall state of the market were more negative.”
On a more positive note, Jenkins explains there is an increased focus on technology and analytics, specifically collateral and margin management, that bodes well for future profitability. “Despite the challenges faced in the OTC market in general and by FCMs specifically, it is clear that the focus of innovation is still on front-end technology platforms – 75% say they’re using clearing as a way for clients to enter their platform – rather than further tinkering with fees or margin services. This will impact headcount over the next two years.” He adds that analytics and portfolio optimization are seen as key profit growth centers by those FCMs that clear in size, and that as much as 55% of their annual spend is invested in new technology, an amount seen as a barrier of entry for new firms establishing themselves as an FCM.
The report’s results are drawn from second quarter 2014 interviews with 13 FCMs operating in the global OTC markets, firms that according to the Commodities Futures Trading Commission (CFTC) in June 2014 represented $15.5 billion in client funds held for swaps trades, accounting for 50.5% of the total market.
The 22-page, 13-exhibit report is available for download by TABB Group Research Alliance Fixed Income clients and qualified media. For a copy of the Executive Summary or to purchase the report, write to firstname.lastname@example.org.
About TABB Group
Based in New York and London, TABB Group is the research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge” research methodology developed by Larry Tabb.