London – 22 June 2023: Sell-side derivatives clearing firms are expanding their memberships and expecting more competition in the market as interest rate rises add hundreds of millions of dollars to global revenues, a study by Acuiti has found.
The Growing Opportunity in Derivatives Clearing, which is released today 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.
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.
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. At ION, this new demand is evident across our customers. 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. 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 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.”
Download the full report here: https://www.acuiti.io/the-growing-opportunities-in-derivatives-clearing
For more information, contact Nastja Konic at Acuiti
Tel.: +44 (0) 203 998 9190
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.
ION 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 businesses for sustained success through continuous innovation. For example, our solutions for capital markets solutions provide transformative technology to financial institutions dealing in all asset classes. Our award-winning markets solutions automate the full trade lifecycle, provide tools to manage risk, and maximize access to liquidity, while giving real-time access to critical information required for timely operational decisions and global-scale execution.