Sell-side derivatives clearing firms are expanding their memberships and expecting more competition in the market, a study by Acuiti has found.
The Growing Opportunity in Derivatives Clearing, which was released in partnership with ION, found that almost two-thirds of futures commission merchants (FCMs) were planning to expand the number of clearing memberships they have over the next three years.
“There has been a significant and abrupt change in the economies of providing clearing services in derivatives markets over the past decade,” said Ross Lancaster, head of research at Acuiti.
“This is resulting not only in existing FCMs seeking to expand their offerings but also in new entrants eyeing launches. The market needs more FCMs and the continuation of the current conditions is likely to reverse the long-term declines in the number of firms providing services to the market,” he added.
The expansion plans come as rising interest rates over the past 12 months have created the potential for hundreds of millions of dollars in additional revenues to FCMs. This has been complemented by large increases in market volumes creating a dual tailwind for FCMs.
Of the 61 senior executives surveyed, less than 10% said that they thought interest rates would not remain high for long enough for them to expand their business with confidence today.
The reversal in fortunes for clearing comes after over a decade of poor conditions as record low interest rates hit FCMs’ revenues while volumes plummeted in the wake of central bank support of global markets. This contributed to a decline in the number of FCMs globally from around 170 prior to 2008 to 70 today.
While there have been some new entrants to the market over the past decade, the number has been outweighed by firms pulling out of the market and consolidation.
The Acuiti study suggests that this downward trend will soon be reversed as new entrants from both the cryptoassets and retail markets eye clearing memberships to expand their offerings.
However, new entrants face several challenges. Capital charges facing FCMs remain a significant barrier to entry. In addition, firms looking to expand or enter the market cited finding skilled staff, compliance with new regulations and sourcing the right technology as key challenges.
In addition to expanding their memberships, incumbent FCMs are seeking to increase their profitability by optimizing the allocation of cash and collateral pledged to cover client margin requirements.
Francesco Margini, Chief Product Officer for Cleared Derivatives at ION Markets, said: “The radical evolution of the clearing landscape has made real-time post-trade systems all the more critical for the growing FCM community.”
“We see it as a mission for technology providers to resolve the costly, complex challenges that existing or new entrants face when deploying and integrating post-trade infrastructure,” he said.
