Dear Sirs,

Last week in this column, Jim Kharouf, one of my friends in the industry, referred to the “broken” FCM model. Having had a front row seat to the travails of operating an FCM over the past 10 years, I take exception to the word “broken.” While the FCM model has been bent, twisted, shaken and turned on its ear, Mark Twain said it best: “Reports of my death have been greatly exaggerated.”

We all know what has happened to FCMs since business conditions began to change almost eight years ago. For me, the credit crisis began when Sentinel suspended withdrawals in August 2007. With industry scandals, low volatility, increasing regulation, rising compliance costs, potential disintermediation, virtually no interest income and stagnant volumes, it would be easy to declare the FCMs dead, and our model irreparably broken as many have.

But the role that an FCM plays in facilitating the transfer of risk remains a vital component for our industry and for our overall economy, and we continue to help foster efficient markets. Market conditions of the last eight years have forced all who have survived to improve our businesses. Another great scholar, Friedrich Nietzsche, provided us with the perfect summation of the recent FCM experience: “That which does not kill us makes us stronger.”  

So what have most of us done? Specifically, the FCMs that have survived over the last few years have been forced to re-engineer their business and consequently those efforts have resulted in more efficient, better-run businesses. Customers are better protected, systems are more integrated, risk management has risen to the forefront, and most remaining FCMs have streamlined their business models. Those that couldn’t, or wouldn’t, have fallen by the wayside.

What is the end result? Most of the remaining FCMs are mature, better-run, more efficient businesses with better client services, client safety and more capacity. Scant few made those changes to evolve when interest income was rolling in, but that’s what businesses in a changing environment have to do to survive, and that’s what most of us still in business have done and continue to do.

Carl Gilmore
Co-Head of Futures
Wedbush Futures

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