A seemingly innocuous news item from my good friend John Detrixhe at Bloomberg got us all chatting here at Fidessa Towers this morning. The story was about how Eurex Clearing was going to allow large buy-sides direct membership of its derivatives clearing house. The rationale for this is entirely logical as today’s regulations treat client capital as a risk asset and therefore subject to capital ratios. In a capital constrained world then, surely Deutsche Börse is doing the FCM community a favour?
Those of us who have been in the industry a while, however, remember with misty-eyed reverie how the whole industry used to work. Back then, the entire FCM business model was underpinned by the spread between the capital you took in as margin and what you paid out to clearing houses, and at the same time by making money on the difference. Zero and even negative interest rates shoot the first hole in the this model and now Eurex looks to torpedo it below the waterline with this latest move.
The simple fact is that the futures industry is morphing into the top ten global FCMs that can provide global access and clearing, and everybody else. For the big guys it is simply about scale and, more importantly, achieving economies from that scale. For everyone else it’s about finding their niche and leveraging the scale of the big boys. Taken to its natural conclusion then, we should expect a dramatic fall off in trophy memberships of exchanges which, in any event, are themselves being condensed into the big three derivatives exchange groups. And, at the same time, we can expect a battle between the global FCMs and the exchanges around who can offer the most efficient use of capital to their end customers.
Much like when Uber uncovered the fundamental inefficiency in automobile use, we had better watch out – lest we all end up as disgruntled taxi drivers.