Opinion piece by Richard Strait | Strait, LLC
Over the past 7-10 years the FCM community has contracted exponentially to just a handful of providers. While many reasons for this can be cited, those that stand out are the increased costs of the regulatory compliance and increased capital requirements, coupled with skyrocketing regulatory haircuts levied on that capital and lower revenues.
While the electronic market place has increased the cost efficiency of the Exchanges and their member firms, Capital “haircuts” on customer segregated funds alone may reach 10% in the near future while only five years ago they were as low as 4%.
Many FCMs, particularly those who are subsidiary companies of larger firms and banks, must now go back to the parent for additional capital. Although the cost of money to the banking community is at record lows, parent firms may require 5% or more for the regulatory capital allocation.
Coupled with additional haircuts applied to non-cash original margin deposits, downward pressure on commission rates, and receiving nothing in interest on overnight cash balances - well, something has to give.
The only answer is that there will be upward pressure on commission rates by the surviving FCMs. The already finicky FCM community will continue to cherry pick the best commercial and institutional clients, while the smaller commercial and retail clients and their IBs will be shopping for service providers in a frighteningly narrow space.
Will the day come when our fears of customer funds being handled directly by the exchanges or some even larger clearinghouse come true? With the sanctity of segregated funds now in doubt by the fall out of the MF Global collapse, I say the odds are good.
Submitted by Rich Strait, Managing Member of Strait, LLC, an IIB located in Miami, Florida. Contact Rich at rich@straitllc.com.
