No, at Abaxx Exchange we don’t believe the era of the traditional FCM model is coming to an end, nor should it be. However, the recent Risk.net article “Brokers slam CME over ‘conflict of interest’ in FCM plan’ made us realize that not everyone may feel the same way, and we need to make our case for the traditional FCM model.
Some exchange groups ranging from the largest that date back more than a century to the digital asset focused upstarts have asserted that risk mutualization processes — currently favored and handled by FCMs — can and should be disintermediated.
Further examination of the proposed structure of disintermediation supposes FCMs will be displaced by regulated Exchanges and Clearing Houses. They will directly manage the risk of large diverse customers and products in addition to acting as the ‘self-regulator’ of these markets. This is an inherent conflict of interest.
The multiple dimensions of a complex market structure necessitate the mutualization of risk amongst a diverse array of FCMs who work with many competing market participants. One of the misinterpretations of the FCM model is that they are only there to process trades, handle margin and make margin calls. In reality the FCM model has been, since the beginning of modern day futures markets, innovating important trade/margin finance strategies, risk management methods, technologies and tools.
Commodity markets exist to support the management of multi-factor risks, none more important than delivery risk. Delivery risk today is, in many markets, managed in part by a mutualized clearing house in partnership with its FCMs who in turn work with their clients and the financiers of those clients in an extraordinary network that goes beyond the four walls of the clearing house.
Proposals which disintermediate the deep and diverse pool of capacity embedded in the clearing firm community ignore the importance of the FCM role in times of acute stress on the delivery function in global commodity markets. Go ahead and ask anyone in Europe looking for an alternative retail provider of gas or power in the networked markets that have seized up going into this winter.
The market consequently evolves as distribution and delivery systems improve. None of the current proposals substantially address this fundamental function of efficient futures markets. Experienced market professionals managing the precarious situation and volatility in today’s global energy markets recall the important role that FCMs operating through mutualized clearing houses have played in defaults such as Enron, Amaranth and Man Financial.
The industry needs tools to make the mutualization process faster and more secure. These technological tools will drive the next era of commodity futures exchanges. And they will be at the fingertips of, and controlled by the people that form the markets, not algorithms. These are the traders, the financiers and the FCMs that collectively deliver the capacity to keep our economies moving.
~Joe Raia, Chief Commercial Officer Abaxx Exchange