FCMs target expansion, and new entrants eye the market as interest rates and volumes boost revenues

22 June 2023

LONDON – 22 June 2023: Sell-side derivatives clearing firms are expanding their memberships and expecting more competition in the market as rising interest rates add hundreds of millions of dollars to global revenues, according to an Acuiti study.

The Growing Opportunity in Derivatives Clearing, released today in partnership with ION, found that almost two-thirds of futures commission merchants (FCMs) plan to expand their number of clearing memberships over the next three years.

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. At the same time, volumes plummeted in the wake of central bank support of global markets. This combination contributed to the number of FCMs globally declining from around 170 before 2008 to 70 today.

While there have been some new entrants to the market over the past decade, firms pulling out of the market and consolidations have outweighed the number.

The Acuiti study suggests that the downward trend will soon be reversed as new cryptoassets and retail market entrants eye clearing memberships to expand their offerings.

However, new entrants face several challenges. Capital charges facing FCMs remain a significant barrier to entry. Firms looking to expand or enter the market also cite finding skilled staff, compliance with new regulations, and sourcing the right technology as challenging factors.

Francesco Margini, Chief Product Officer for Cleared Derivatives at ION Markets, said: “The radical evolution of the clearing landscape has made powerful real-time systems and back-office functionality all the more critical for the growing FCM community. At ION, this new demand is evident across our customers. We see it as a mission for technology providers to resolve the costly, complex deployment challenges new entrants face when modernizing their post-trade infrastructure. Rather than being a barrier, technology solutions – such as ION’s XTP Spark – should reduce vital overhead for businesses and enable them to seize opportunities in a competitive and volatile environment.”

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.

“There has been a significant and abrupt change in the economies of providing clearing services in derivatives markets over the past decade,” says Ross Lancaster, head of research at Acuiti. “This is resulting in existing FCMs seeking to expand their offerings, and 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.”

Download the full report here: https://iongroup.com/resource-center/markets/shifting-trends-for-fcms/

About Acuiti
Acuiti is a management intelligence platform designed to provide Senior Industry Professionals in the Derivatives Industry with high-value insight into industry-wide performance and business operations. Acuiti provides a platform through which our exclusive network of Senior Industry Executives can share and source information on day-to-day operational challenges, providing them and their management teams with increased transparency and in-depth analysis to make more informed decisions and benchmark company performance. Financial Institutions benefiting from our services include Banks, Non-bank FCMs, Brokers, Proprietary Trading Firms, Hedge Funds, and Asset Managers.

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About ION Group

ION Group provides mission-critical trading and workflow automation software, high-value analytics and insights, and strategic consulting to financial institutions, central banks, governments, and corporates. Our solutions and services simplify complex processes, boost efficiency, and enable better decision-making. We build long-term partnerships with our clients, helping transform their business for sustained success through continuous innovation. For more information, visit https://iongroup.com/.

About ION Markets

ION Markets provides transformative technology and solutions to financial institutions dealing in equities, fixed income, foreign exchange, cleared derivatives and secured funding. Our award-winning end-to-end solutions simplify clients’ operations by automating the full trade lifecycle, providing tools to manage risk, and maximizing access to liquidity, while giving real-time access to critical information required for timely operational decisions and execution on a global scale. For more information, visit https://iongroup.com/markets/.