Dan O’Neil, vice president of futures at optionsXpress, agrees. “The other big story is that the penalties for being non-compliant are now more severe than ever before. The steady drumbeat of new rules and regulations combined with the seriousness of being non-compliant means firms are focusing intently on this sort of thing.
“You might be familiar with a recent ruling that requires all futures industry participants to record and archive all communications that lead to the execution of a futures order, and that is presenting a number of problems for firms. There’s been very little interpretive guidance from the regulators as to what this means exactly, but we’re working hard on that right now.”
Kadlec agrees about the need for guidance: “The CFTC, NFA, and the exchanges could help immensely with this by putting out guidance letters and white papers that bridge the gap between theoretical rules and the practical implementation of the new rules.”
Enter the SWAP teams
A new rule that bodes well for the business is the move of the OTC swaps to be cleared via swaps execution facilities. And this, according to the TABB Group report, could be a boon for the industry. Of the FCMs that TABB interviewed, most saw this as a major growth opportunity for them; in fact, it could mean a 15% increase in revenues. The futurization of the swaps markets could be very good indeed for those firms who are approved, or are planning to be approved, swaps dealers. This includes typically the largest of the firms, such as Newedge, which was in the first 18 firms to be approved, to mid- to large-firms, such as FCStone Group. But for mid- to small-sized firms, the swaps business may be good for their larger brethren, but won’t be an area they have clientele. Even some mid-sized firms, such as TradeStation, cater mainly to retail business, so swaps aren’t an area for growth.
Says Newedge’s new CEO David Escoffier: “The futurization of swaps as well as OTC clearing are both major growth drivers for us. Clients have turned more and more to deliverable swap futures and we are actively engaged with the respective CCPs as well as new providers and new exchanges such as GMEX and Eris. Overall, the futurization of swaps is completely synergistic to our business and as the market leader in clearing of listed derivatives, we welcome this trend.”
Pete Nessler, CEO of FCStone Group, also believes this is a growth area for his firm, largely because they have a sizeable ag clientele that does swaps. He notes they already have seen “large increases in block trading.”
TABB found that 90% of their respondents believe swaps “hold the potential to bring new liquidity to the futures markets,” and in fact, the firm estimates swap futures will capture 3% of the swaps market, meaning huge growth, especially in the interest rate futures contracts. TABB reports some respondents already see a slowing down of the OTC desk business as the expenses of the OTC products increase.
So is there growth for non-swap firms? Apparently, yes. TD Ameritrade, which purchased ThinkorSwim in 2009, has seen huge growth in the appetite of its equity trader-clientele base for derivatives. Steve Quirk, executive vice president, notes that when they were first bought by TD Ameritrade, the group brought in about 9% of the revenues. Today they account for 40%, and the main growth has been by providing current equity clientele derivatives products. O’Neil echoes the sentiment with optionsXpress’ parent Charles Schwab’s clientele that is looking to hedge portfolios or trade derivatives.
Carl Gilmore, CEO of KCG (Knight Capital Getco), agrees with this growth potential. “Of course swaps are one thing, but the traditional futures space needs to do a better job as an industry telling our story to the world. The metric that always gets used is that futures activity is about 8%-9% of all activity in the capital markets in this country. So, if we were to expand the users of our markets by 5% and go to 13%, then the industry is now 50% bigger. I tend to see traditional market participants coming back in, including retail traders that had been on the sidelines.”
TABB’s Simon even sees this in the institutional space. “More traditional asset managers are seeing the benefit of using derivatives; many are starting up derivatives trading desks.”
But others see growth internationally, and as Simon notes, “when we ask where investors want to go, China is by far the number one request.”