The “vanishing FCM” has recently become a hot topic. CFTC Commissioner Giancarlo gave a speech to the Market Risk Advisory Committee in June 2015, where he pointed out the dwindling number of FCMs and the concentration of customer assets in the top 5 FCMs. Reuters followed up with an article and Walt Lukken of the FIA gave an interview to the Financial Times. The common theme being the cost of regulation and increased capital requirements.
There were 142 FCMs before the financial crisis in October 2008 and as of May 2015 there were only 74. On its face this represents a dramatic decline, but a careful look behind the numbers reveals that many firms registered as FCM do not conduct any futures business. Retail forex was permitted to be conducted by banks, insurance companies and broker dealers or FCMs. The easiest route was for a forex dealer to register as an FCM and take in no customer segregated funds and conduct no futures business. With a net capital requirement of only $500,000 or $1,000,000 these Forex firms were able to conduct forex business with almost no regulation. That all changed when the NFA was given the authority regulate and increase the capital requirements for Forex Dealers. This drove most Forex Dealers off shore or out of business.
If you strip out the 69 FCM/Forex dealers that were registered in October 2008 that had no customer segregated funds, you are left with 73 true futures FCMs.Of the 74 FCMs registered currently, there are 15 holding no customer segregated funds and conducting no futures business( Forex and Swap dealers), leaving a net of 59 true futures FCMs. Therefore we have a net decline of 14 true futures FCMs (73-59=14) over the past 6 and a half years. The reasons for each FCM closing vary widely. For some it was financial trouble and for others it was serious regulatory or compliance issues. For others there were mergers or consolidations.
The good news is that the number of FCMs leaving the business has slowed to a trickle and new firms are applying to take their place. There are several FCMs from Asia who have registered in the past few years. Recently UOBBF, Scotia and Pictet have become FCMs. Others such as Tradovate are going through the application process. This good news for the industry and for IBs in particular.
Whether it was financial trouble or compliance trouble, it is my belief that most FCM issues could be solved with a decent return on float. These years of zero interest rates have been devastating. Even a 1 or 2% return on customer assets will keep the current roster in business and probably bring in new entrants. Perhaps the Wedbush acquisition of Crossland and KCG is a sign that smart money is beginning to recognize the value in an FCM when interest rates rise.
Marc Nagel
