FCMs still haunted by the past
FCMs still face challenges despite the potential lifting of regulations and higher interest rates
Like the rattling chains of Jacob Marley haunting Scrooge, the ghosts of MF Global and PFG still wander the halls at futures commission merchants today and remain alive and well in the manifested actions of CTAs who diversify their funds among brokers.
But realities exist: there are fewer FCMs in which to diversify, and many bank FCMs won’t take anything smaller than an account that can guarantee them $1m in fees annually, which they can get because big clients want sizeable balance sheets and credit worthiness...
Today the top 10 firms (nine bank FCMs and non-bank ADMIS) account for 73% of segregated funds, while in 2011 they accounted for roughly 77% of segregated funds.
According to CFTC reports, in 2011 there were 110 FCMs, while today there are 66 (and only 58 of those carry segregated funds)...
“Five years ago you could open a bank FCM account in a month, but now it takes at least four months,” he says. Vassallo adds that the process sometimes is so “arduous” that the client will forgo the hedge and just accept the risk to avoid the paper nightmare.
There are also new fees. Matt Peluse, head of Esulep Management, which uses five FCMs, notes that they get charged now for capital carry and even for posting T-bills. “They are ticky-tack charges in the scheme of things, it’s not a lot of money but we’re a large client for them.”
Another complaint from the CTA side is excessive margin requirements by FCMs.
“Requiring multiples of exchange minimum margins is up there on our [issue] list.
Perhaps we’re more sensitive to that than others as we were forced to hold 2x exchange minimums at MF Global before they went under, and that just made it more difficult for us to stay in business until we recovered our money,” one CEO of a long-time CTA says...
“The cost of running the business is high due to the increased regulatory burdens related to leverage and capital (RWA), as well as from IHC requirements,” says Alain Courbebaisse, head of US prime brokerage, Société Générale...
“Plus, a larger proportion of client fees are going to the exchanges rather than to the FCMs, which is crimping profitability at FCMs.
“We are still in an environment where margins for FCMs are being squeezed and profitability is low.”
Joe Guinan, chairman and CEO of Advantage Futures concurs.
“Because exchanges are charging clients so much money for quote fees, they have shrunk the industry and forced out a lot of traders,” he says.
He adds that a pretax trading profit five years ago of $50,000 might net $20,000 today because of higher exchange and quote fees.
“Yes, it’s a pass along to the client, but a rising cost to the end user has shrunk the number of traders, which in turn has hurt the FCMs.”...
“It seems most FCMs these days are run by compliance people and have no interest in doing what’s best for their customer,” says Mike Dever of Brandywine Asset Management.
“Their first response, which they often adhere to, is ‘no’...
FCMs still face challenges despite the potential lifting of regulations and higher interest rates
Like the rattling chains of Jacob Marley haunting Scrooge, the ghosts of MF Global and PFG still wander the halls at futures commission merchants today and remain alive and well in the manifested actions of CTAs who diversify their funds among brokers.
But realities exist: there are fewer FCMs in which to diversify, and many bank FCMs won’t take anything smaller than an account that can guarantee them $1m in fees annually, which they can get because big clients want sizeable balance sheets and credit worthiness...
Today the top 10 firms (nine bank FCMs and non-bank ADMIS) account for 73% of segregated funds, while in 2011 they accounted for roughly 77% of segregated funds.
According to CFTC reports, in 2011 there were 110 FCMs, while today there are 66 (and only 58 of those carry segregated funds)...
“Five years ago you could open a bank FCM account in a month, but now it takes at least four months,” he says. Vassallo adds that the process sometimes is so “arduous” that the client will forgo the hedge and just accept the risk to avoid the paper nightmare.
There are also new fees. Matt Peluse, head of Esulep Management, which uses five FCMs, notes that they get charged now for capital carry and even for posting T-bills. “They are ticky-tack charges in the scheme of things, it’s not a lot of money but we’re a large client for them.”
Another complaint from the CTA side is excessive margin requirements by FCMs.
“Requiring multiples of exchange minimum margins is up there on our [issue] list.
Perhaps we’re more sensitive to that than others as we were forced to hold 2x exchange minimums at MF Global before they went under, and that just made it more difficult for us to stay in business until we recovered our money,” one CEO of a long-time CTA says...
“The cost of running the business is high due to the increased regulatory burdens related to leverage and capital (RWA), as well as from IHC requirements,” says Alain Courbebaisse, head of US prime brokerage, Société Générale...
“Plus, a larger proportion of client fees are going to the exchanges rather than to the FCMs, which is crimping profitability at FCMs.
“We are still in an environment where margins for FCMs are being squeezed and profitability is low.”
Joe Guinan, chairman and CEO of Advantage Futures concurs.
“Because exchanges are charging clients so much money for quote fees, they have shrunk the industry and forced out a lot of traders,” he says.
He adds that a pretax trading profit five years ago of $50,000 might net $20,000 today because of higher exchange and quote fees.
“Yes, it’s a pass along to the client, but a rising cost to the end user has shrunk the number of traders, which in turn has hurt the FCMs.”...
“It seems most FCMs these days are run by compliance people and have no interest in doing what’s best for their customer,” says Mike Dever of Brandywine Asset Management.
“Their first response, which they often adhere to, is ‘no’...
