Derivatives expert John P. Needham, president of Needham Consulting, alerted us more than a year ago at Financial Technology Forum’s DerivOps Chicago conference in April 2014 to the fact that 10 futures commission merchants (FCMs) are handling 75 percent of U.S. customer segregated funds, a shocking truth compared to a little over a decade ago, according to data from the CFTC.
Needham regularly reviews the FOCUS reports that FCMs and broker-dealers submit to the CFTC and the FCM 1FR forms that non-broker-dealers submit. “In 2003, the top-five FCMs had 41.7% of the total reported customer segregated funds, and the top-10 had 65% of the segregated funds reported. By 2013, the top-five reported 49.6% and the top-10 had 75% of the US customer segregated balance,” Needham said last year, quoting the CFTC. “That’s right, as of December 2013, more than three quarters of all the US customer segregated funds were held at just 10 FCMs.”
Needham recently downloaded the FCM data from the CFTC and sorted through the data for the latest on customer segregated funds.
“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,” Needham says in a recent blog posting. The top five FCMs carry 51% of the customer segregated funds: Goldman Sachs, JPMorgan, SocGen (formerly Newedge), Merrill Lynch and Morgan Stanley, he says. If the next five FCMs are counted with top five, the top 10 firms “carry 74% of the Customer Seg balances. Rounding out the top-10 are Credit Suisse, UBS, Citi, Barclays, RJ O’Brien,” he says.
“I spoke about this a little more than a year ago at the FTF Derivops Conference in Chicago,” Needham says. “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. … These are awful numbers, it is an awful trend.”
By the end of 2003, 102 FCMs reported to CFTC that they cleared customer business (customer segment balances), Needham says. “At year-end 2013, just 69 did. By April 2015, that number had dwindled to just 57.”
I checked in with Needham last week to get more insight into the situation. The questions are mine.
Q: Does the latest data from the CFTC mean that there are only 57 FCMs serving the U.S. market?
A: It means that there are 57 FCMs clearing customer business on U.S. exchanges, and reporting customer segregated funds on their FOCUS report and/or the FCM 1-FR reports [to the CFTC].
Put another way, if you are a futures customer, you’re using one of those 57 FCMs. Those are the only choices you have. At year-end 2003, you had 102 FCMs to choose from.
Q: How much worse can it get?
A: Who knows? It can get worse, but I hope it gets better. Soon.
Q: What are the reasons for the 40% drop over the past decade to 57 FCMs reporting customer segment balances to the CFTC?
A: ‘Customer seg’ in my blog post means customer segregated funds, not ‘customer segment balances.’ There are lots of reasons.
Consolidation is one reason. Compliance costs are certainly a contributing factor. So is the current long-term, zero-interest-policy. So is competition among FCMs that pre-dates the financial crisis, where commissions trended lower. But as some have pointed out, fewer choices now might lead to higher commissions for the remaining FCMs. That remains to be seen. And if/when commissions start to trend back up, we may see more firms trying to get into the FCM space. That also remains to be seen.
Q: Would there be more FCMs if the Federal Reserve would spur an increase in interest rates?
A: Yes.
Q: Have you witnessed a retreat from the reformed over-the-counter (OTC) swaps derivatives markets?
A: I’m not sure what you mean by the ‘reformed OTC swaps market’ but we’ve seen firms leave that space. Nomura was the latest.
Q: How would you characterize the OTC reform effort?
A: Generally beneficial for market users. Eris Exchange just reported their highest-ever volumes and open interest in swap futures contracts.
CME deliverable swaps futures continue to grow.
More exchanges are giving relief by margining futures and swaps as a single portfolio, and more firms are making that available to their customers, and firms are tapping into that for their own house portfolios too.
I think that as regulators continue to push regulations that make swaps trading more expensive — especially bilateral ones — exchanges and firms will continue to innovate to try to deliver cost-effective alternatives to bilateral swaps. What Eris, CME and Eurex are doing are positive steps in that direction.
Need a Reprint?
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