Regulatory changes since the financial crisis have transformed the landscape for derivatives clearing. Increased fixed costs associated with new rules have encouraged consolidation in the industry. Requirements for centralized clearing of some OTC products have helped some Clearing Brokers (FCMs) and hindered others. In this article, we analyze the trends in market share of FCMs for both exchange traded and centrally cleared OTC products.
For the analysis, we examine FCM data within the US market to investigate a number of brokers which are available to investors. We are then able to put together league tables for brokers in various categories of cleared derivatives.
Overall, we find that the cleared derivatives business has become highly concentrated within a handful of brokers and that any growth has come from a growth in cleared swaps. We also find that European firms are shrinking or not keeping up with the growth of their US counterparts.
We begin with a count of the registered FCMs every month since reporting began in 2002. By the end of 2016, there are only 68 FCMs, down two from June 2016, and down nearly a third off the 2004 peak of 190 firms.
Figure 01 tracks the number of FCMs by US regulatory bucket. These buckets are simply classifications of product type. The 'Seg' bucket includes domestic US listed derivatives, for example CME-listed futures and options (F&O). '30.7' includes foreign listed derivatives, for example US clients trading in Eurex-listed F&O. 'Swap' handles all cleared swaps, and 'Forex' includes OTC FX.
Figure 01: Count of FCMs, broken down by firms' reporting requirements in each regulatory bucket
Of the 68 total registered FCMs at the end of 2016, there are 55 active in Seg, 45 in 30.7, and importantly, only 19 in Swap and 5 in Forex.
How Much Margin?
Next, we graph the amount of margin held by FCMs, per regulatory bucket. This is shown in Figure 02.
Figure 02: Margins required by regulatory class by quarter
We observe a significant overall growth in derivatives cleared by FCMs since reporting began in 2002. There was a peak at the financial crisis of 2008 and any recent growth has been within cleared swaps, for which reporting began in 2014. The amount of collateral required to support listed derivatives has not changed much in the past eight years.
We now turn to the league tables for the industry, and how these league tables have changed over recent history. We start with cleared swaps in Table 01.
Table 01: FCM League table: Swaps - required customer margins (millions of USD)
The first thing that should be obvious is the concentration of business. While there are 25 firms on the list, only 19 of them have any client margins as of the most recent quarter. Further, the top 10 firms account for 96% of the business, the top 5 firms for 74% and the top 3 handle 50%.
At the top of the list is Morgan Stanley, which has moved up three places since swap reporting began in January 2014. Looking closer at the companies' origin, European firms have generally lost ground, perhaps reflecting their inability to extend balance sheet to this business.
We should also note the growth in the total swap margins has tripled from 25 billion USD in 2014 to 77 billion USD in the most recent quarter.
If we turn to another data source (Clarus CCPView), we can try to corroborate this growth (Table 02). And because CCPView data is global, not just US cleared data, we can also make a good estimate of how much of the global clearing activity is housed by US FCMs.
Table 02: Global CPPView disclosures for initial margin among four CPPs (millions of USD)
We can do this by selecting the four main clearing houses utilised by US FCMs (CME CDS, CME IRS, ICE and LCH), which shows us about 148 billion USD in total global swaps margins in this most recent quarter.
If we then compare these Global CCP margins over the past year with US FCM margins (see Table 03), we see that FCM swap margins are growing at a similar pace, generally accounting for roughly 50% of global swaps clearing.
Table 03: Initial margins required (millions of USD)
Futures and Options
Table 04 is a league table for Futures and Options (Seg). This table shows the top 25 of the 55 active FCMs for Seg Futures and Options. The concentration theme is also present here, with the top 2 firms accounting for 26% of the business. The top 5 handle 53% and the top 10 handle 74%.
Table 04: FCM League table: Futures and Options (Seg) - required customer margins (millions of USD)
Combined League Table
And to wrap up, combining all four regulatory buckets, we have the overall league table as of September 2016 shown in Table 05. It clearly shows the now familiar story of concentration, this time at an aggregate level.
Table 05: FCM League table: September 2016 overall (millions of USD)
The general theme within the US Clearing data has consistently shown:
- The growth in clearing is in swaps.
- European banks stand out as retreating, or not growing as much as US firms.
- The business is concentrated within the top 5 firms.
A bit of a broken record, particularly if you are concerned with the reduction in firms in this space and the increased concentrations. The only cause for optimism would be that the industry is growing in swaps.