Futures Commission Merchants, Customer Funds and Capital Requirements: An Organizational Analysis of the Futures Industry

Abstract

We study futures commission merchants, or “FCMs,” who are the important intermediaries through which institutional, corporate and retail customers conduct trading in interest rate, currency and commodity futures. We construct and examine a data base of FCM financial information including holdings of customer segregated and secured funds intended to support trading on U.S. and foreign futures exchanges over the period 1995−2018. We find significant industry consolidation as well as structural changes including the increased dominance of FCMs who are bank-affiliated or are dually-registered as broker-dealers. We also examine how these changes have been influenced by regulatory initiatives including those resulting from the 2008 financial crisis as well as by the collapse of notable FCMs due to alleged fraudulent activities and misbehavior involving customer funds. Finally, we investigate the effect of these changes on market concentration and competitiveness.

Keywords: Futures, derivatives, futures commission merchant, segregated funds, regulation, CFTC

JEL Classification: G18, G23, G24, G32, L51