The futures commission merchant (FCM) space is likely to change dramatically in the coming years. How is the question. John Lothian News sat down with Gary DeWaal, of Gary Dewaal Associates, for his views on the shape of the brokerage industry in the coming years.

“For years FCMs have tried to be everything to everybody,” DeWaal says. “Frankly, except for two or three of the big FCMs, that is not a reasonable prospect going forward. I think that FCMs are going to really have to figure out what its niche is.”

DeWaal, the longtime general counsel for Newedge, said the existing business model for FCMs is not sustainable in the long run, largely due to new regulations and capital/margin requirements in the aftermath of the Dodd-Frank Act and European regulations.

In DeWaal’s view, the industry will be heavily weighted toward really large players and larger brokers in the futures space, followed by mid-tier and smaller players. While that would seem to state the obvious, DeWaal says that each of those firms will have to differentiate themselves like never before. In his view, there will be a division of services for brokers, clearing utilities and clearinghouses.

“I think the big guys can be everything to everybody,” DeWaal says. “The next (tier) of big guys will determine what fits their corporate infrastructure needs, what their core selling possibilities are and what their core synergies are.”

Middle and smaller tier FCMs going forward, “will look more like Introducing Brokers.”

DeWaal says that if FCMs “could create clearing utilities, maybe through consortiums of some kind so the costs are spread through a bigger group. And then each of the current FCMs could concentrate on customer service, and plug into the clearing utility and then figure out what to offer clients.”

He says there are many possibilities available in that scenario, where FCMs then can offer customers a variety of choices such as: collateral management, cross-selling with financing or distribution networks.

“I think you’re going to see more logical differentiation and more logical product selling,” he says.

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