Another focus would be continued regulation. Guinan says, “Greater regulatory costs will need to be passed on to clients in some manner.” However, he also notes, “As this rash of regulatory over-reach subsides, the FCM industry can focus on expansion and the exchanges can turn their attention to creating new products rather than jousting in Washington.”
TABB’s Simon agrees that consolidation is definitely going to continue, but he says “it’s harder for me these days to believe there will be a smaller number (of FCMs) as the number is starting to level off,” he says (see “Bigger firms getting bigger piece of pie,” below). What he sees more likely is a large firm could leave the business, allowing other firms to grab market share. However, he does see business migrating to the biggest players with the big balance sheets, and that capital is power in the business.
Escoffier agrees, stating: “Managing cash and collateral have become more important than ever with banks facing term liquidity shortages and pressure to diversify their sources of funding in the face of Basel III and CRD IV. Centrally cleared OTC markets also require higher initial margin and collateral capital. Hence, cash has become an asset class rather than a borrowing class pre-crisis.”
In the end, many FCMs are optimistic. Guinan notes “As the fixed income market descends, volume and return on investment of client funds should rise concomitantly — benefitting the entire FCM community.”
Gordon agrees, saying: “Despite all that the FCM community has been through in the past couple of years, there is tremendous potential in the FCM model, and no one should underestimate our ability to innovate and reinvent ourselves as new challenges come our way.”