Lynn Strongin Dodds explores the findings of a recent report examining the current risks and opportunities for FCMs in the coming years.
Uncertainty is never a good thing for markets but a new report– The Next Four Years: The Outlook for FCMs Under the Second Trump Administration finds that the current volatility may not necessarily be a totally bad thing.
The report conducted by Acuiti, in partnership with ION Markets, offers insights into the current risks and opportunities for sell-side firms offering derivatives clearing services. It examines key regulatory changes, the spikes in market volatility, and evolving client appetites for trading in markets such as China and India under what is often dubbed as Trump 2.0.
The study, which canvassed 59 senior executives from leading global Future Commission Merchants (FCMs), found that 86% were positive about the outlook for clearing activity due to President Trump’s stance on deregulation and sustained market turmoil. Only 2% were negative, while 12% saw no impact. US firms rather than their European counterparts were seen as the main beneficiaries, because fewer firms were expecting local market growth or the loosening of any rules.
In general, two thirds of respondents across the board thought the rise in volatility was good for business. However, recently, markets have been unsettled by the whipsawing of announcements on tariffs and the toll this could take on global growth. Currently, tariffs have been imposed against Mexico, Canada, China as well as steel and aluminium imports although announcements are made and retracted on an almost daily basis..
Stock markets have responded accordingly with the S&P sliding 10% since it hit a high earlier this year and 2.7% on 10 March alone – its steepest decline of the year. By contrast European exchanges had stellar returns with the pan-European STOXX Europe 600 posting 3,4%- its best start to a year since 2019 in absolute terms.
Geopolitical tensions were also rattling respondents who saw them as a major headwind. This not only applies to the ongoing wars in Ukraine and the Middle East but also fears over the Trump’s administration’s attempts to shake up the status quo. The consensus in the study was that there could be a serious rupture of established norms that threaten FCM’s ability to operate globally. For example, on the regulatory front, the study points to talk of possible US restrictions on clearing outside national borders which would add an extra layer of complexity and cost.
It is no wonder then that the Trump policies are impacting FCMs attitude towards risk. A third of survey respondents plan to increase their internal risk appetite in the belief that deregulation and higher revenues will increase confidence – at least in the short to medium-term. However, over half were not going to make any changes while only 1% intended to reduce it.
All respondents were also concerned about rising competition especially in the nonbank community. Three quarters of respondents think this will intensify over the next four years as these new entrants try to muscle in on their territory in a much more aggressive way. This explains why many FCMs are upping their technology spend with automation, front-to-back integration and post-trade processing being key target areas. These tools are seen as essential in sharpening their edges as well as boosting capacity to meet expected volume due to elevated volatility.
Three quarters also believe that AI will play a significant role in clearing over the next four years, particularly in risk assessment, fraud detection and operational efficiency. More specifically FCMs saw significant potential in deploying the technology in middle and back-office operations to automate manual laden compliance functions such as cross-referencing policies with regulatory rulebooks.
As for the much debated and discussed blockchain, the report found that adoption remains low at 25% with most firms either having no plans for implementation or taking a longer-term approach. The most common use case was in payments although margining and reconciliations are also being considered.
Having a technology plan is one thing but executing it can bring its own set of challenges. Almost one third of respondents pointed to the issues of quantifying and realising a return on the investment while around the same percentage underlined the issues with the scalability of the current technology on the market. Meanwhile, 17% cited inefficiencies in their front-to back integration followed by 13% and 10% naming the overall pace of regulatory change and cross-asset integration with derivatives.
However, as the report notes, “FCMs – both bank and non-bank – that balance selective technology investment to grow their businesses and meet compliance requirements will be best placed to exploit the market opportunities and mitigate the risks over the coming four years.”
