Futures brokers feel strain from low interest rates and red tape

The ranks of futures brokers are shrinking at a quickening pace as low interest rates and new financial regulations put severe strain on the middlemen of the $27tn listed derivatives markets.

Data from the Commodity Futures Trading Commission, the US derivatives regulator, shows the number of registered brokers - known as futures commission merchants - stood at 74 at the end of February. That is down from 91 a year earlier, and 189 in February 2005, and the US trend of accelerating industry concentration is a proxy for the global market because most big futures brokers have operations spread across the world.

Industry insiders expressed concern the declining number of futures brokers could hinder the industry's ability to shoulder customer positions if one of the largest brokers failed, as happened with Lehman Brothers in 2008 and Refco in 2006. Three quarters of assets held by US registered brokers on behalf of their customers - ranging from farmers to fund managers - are concentrated with the 10 biggest industry players, including Goldman Sachs, JPMorgan Chase and Societe Generale.

"If you take out the first two, what are the capabilities of the next eight?" said Rob Creamer, chief executive of Geneva Trading, a proprietary trader, last month.

Futures brokers are crucial links between traders and listed derivatives markets, collecting and disbursing the margin money that ensures financial commitments are met.

Customer confidence in futures brokers was shaken by the collapse of MF Global in 2011 and allegations of fraud at Peregrine Financial Group in 2012.

The long period of near-zero interest rates has eliminated a source of income for futures brokers, which can invest excess collateral placed by clients. The demise of MF Global, which collapsed with $1.6bn in customer funds trapped inside the firm, led to costly new regulations.

The Basel banking rules force bank-owned futures brokers to maintain capital against customer funds, adding to costs, according to the FIA, a trade body.

Goldman Sachs announced last month it would raise fees for clearing futures trades as it passes on the cost of the new regulations.

"Everyone's going to have to deal with this new ecosystem. It's not sustainable as it's structured today if you want to be profitable," said the head of a top 10 bank-owned futures broker.

Gerry Corcoran, chief executive of RJ O'Brien, a Chicago-based broker, said in an interview in March that it has been "arguably the toughest five years in the history of the futures industry".

The latest futures broker to feel the impact of the new regulations is Bache, whose name will cease as the business shifts from Jefferies to SocGen.

Companies that have quit futures broking in the past year include BNY Mellon and KCG Holdings.

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