IDEAS home Printed from https://ideas.repec.org/a/eee/jocoma/v18y2020ics240585131930008x.html
   My bibliography  Save this article

Futures commission merchants, customer funds and capital requirements: An organizational analysis of the futures industry

Author

Listed:
  • Emm, Ekaterina E.
  • Gay, Gerald D.
  • Shen, Mo

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 including a 68% decline in the number of carrying FCMs. We also find significant structural changes including the increased dominance of bank-affiliated and dually-registered, broker-dealer FCMs, with the latter now accounting for 54% of all FCMs and 92% of customer funds held. We discuss regulatory initiatives potentially influencing the consolidation including those resulting from the 2008 financial crisis as well as from the collapse of notable FCMs due to alleged fraudulent activities and misbehavior involving customer funds. Finally, we analyze associated changes in market concentration and competitiveness.

Suggested Citation

  • Emm, Ekaterina E. & Gay, Gerald D. & Shen, Mo, 2020. "Futures commission merchants, customer funds and capital requirements: An organizational analysis of the futures industry," Journal of Commodity Markets, Elsevier, vol. 18(C).
  • Handle: RePEc:eee:jocoma:v:18:y:2020:i:c:s240585131930008x
    DOI: 10.1016/j.jcomm.2019.100093
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S240585131930008X
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jcomm.2019.100093?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Irwin, Scott H. & Sanders, Dwight R., 2012. "Financialization and Structural Change in Commodity Futures Markets," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 44(3), pages 371-396, August.
    2. Ivana Ruffini, 2015. "Central Clearing: Risks and Customer Protections," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 90-100.
    3. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    4. Caves, Richard E, 1981. "Diversification and Seller Concentration: Evidence from Changes, 1963-72," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 289-293, May.
    5. Daniel R. Fischel & Sanford J. Grossman, 1984. "Customer protection in futures and securities markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 4(3), pages 273-295, September.
    6. Dennis W. Carlton, 1984. "Futures markets: Their purpose, their history, their growth, their successes and failures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 4(3), pages 237-271, September.
    7. Main, Scott & Irwin, Scott H. & Sanders, Dwight R. & Smith, Aaron, 2018. "Financialization and the returns to commodity investments," Journal of Commodity Markets, Elsevier, vol. 10(C), pages 22-28.
    8. Ekaterina E. Emm & Gerald D. Gay, 2005. "The global market for OTC derivatives: An analysis of dealer holdings," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(1), pages 39-77, January.
    9. Jordan, James V & Morgan, George Emir, 1990. "Default Risk in Futures Markets: The Customer-Broker Relationship," Journal of Finance, American Finance Association, vol. 45(3), pages 909-933, July.
    10. Maria H. Sanchez, & Kathleen Dunne, 2017. "An Empire Built On A Lie €“ The Peregrine Fraud: A Case Study On Confirmations As Audit Evidence," Review of Business and Finance Studies, The Institute for Business and Finance Research, vol. 8(1), pages 49-55.
    11. Peterson, Paul E., 2013. "Behind the Collapse of MF Global," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 28(2), pages 1-5.
    12. Franklin R. Edwards, 1983. "The clearing association in futures markets: Guarantor and regulator," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 3(4), pages 369-392, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ekaterina E. Emm & Gerald D. Gay & Han Ma & Honglin Ren, 2022. "Effects of the Covid‐19 pandemic on derivatives markets: Evidence from global futures and options exchanges," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 823-851, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Edward Stringham, 2002. "The Emergence of the London Stock Exchange as a Self-Policing Club," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 17(Spring 20), pages 1-19.
    2. Cruz Lopez, Jorge A. & Harris, Jeffrey H. & Hurlin, Christophe & Pérignon, Christophe, 2017. "CoMargin," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(5), pages 2183-2215, October.
      • Jorge A. Cruz Lopez & Jeffrey H. Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.
      • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2017. "CoMargin," Post-Print hal-03579309, HAL.
    3. Ding, Shusheng & Cui, Tianxiang & Zheng, Dandan & Du, Min, 2021. "The effects of commodity financialization on commodity market volatility," Resources Policy, Elsevier, vol. 73(C).
    4. Pirrong, Stephen Craig, 1995. "The Self-Regulation of Commodity Exchanges: The Case of Market Manipulation," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 141-206, April.
    5. Fry-McKibbin, Renée & McKinnon, Kate, 2023. "The evolution of commodity market financialization: Implications for portfolio diversification," Journal of Commodity Markets, Elsevier, vol. 32(C).
    6. Hussein Abdoh & Michael Chitavi, 2024. "The impact of deviations from soybean product crushing estimates on return and risk," Agricultural Economics, International Association of Agricultural Economists, vol. 55(2), pages 181-199, March.
    7. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Other publications TiSEM 1f3bd844-92ab-4104-8f57-9, Tilburg University, School of Economics and Management.
    8. Shernaz Bodhanwala & Harsh Purohit & Nidhi Choudhary, 2020. "The Causal Dynamics in Indian Agriculture Commodity Prices and Macro-Economic Variables in the Presence of a Structural Break," Global Business Review, International Management Institute, vol. 21(1), pages 241-261, February.
    9. Berna Karali & Scott H. Irwin & Olga Isengildina‐Massa, 2020. "Supply Fundamentals and Grain Futures Price Movements," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(2), pages 548-568, March.
    10. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    11. Christophe Hurlin & Christophe Pérignon, 2012. "Margin Backtesting," Working Papers halshs-00746274, HAL.
    12. Boissel, Charles & Derrien, François & Ors, Evren & Thesmar, David, 2017. "Systemic risk in clearing houses: Evidence from the European repo market," Journal of Financial Economics, Elsevier, vol. 125(3), pages 511-536.
    13. Zaremba, Adam, 2015. "Inflation, Business Cycles, and Commodity Investing in Financialized Markets," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 6(1), pages 1-18, January.
    14. Ackert, Lucy F. & Hunter, William C., 1994. "Rational price limits in futures markets: tests of a simple optimizing model," Review of Financial Economics, Elsevier, vol. 4(1), pages 93-108.
    15. Keim, Jan & Müller, Susan & Dey, Pascal, 2024. "Whatever the problem, entrepreneurship is the solution! Confronting the panacea myth of entrepreneurship with structural injustice," Journal of Business Venturing Insights, Elsevier, vol. 21(C).
    16. Jędrzej Białkowski & Jan Koeman, 2017. "Does the Design of Spot Markets Matter for the Success of Futures Markets? Evidence from Dairy Futures," Working Papers in Economics 17/18, University of Canterbury, Department of Economics and Finance.
    17. Rashid Khan, Haroon Ur & Islam, Talat & Yousaf, Sheikh Usman & Zaman, Khalid & Shoukry, Alaa Mohamd & Sharkawy, Mohamed A. & Gani, Showkat & Aamir, Alamzeb & Hishan, Sanil S., 2019. "The impact of financial development indicators on natural resource markets: Evidence from two-step GMM estimator," Resources Policy, Elsevier, vol. 62(C), pages 240-255.
    18. Bianchi, Robert J. & Fan, John Hua & Todorova, Neda, 2020. "Financialization and de-financialization of commodity futures: A quantile regression approach," International Review of Financial Analysis, Elsevier, vol. 68(C).
    19. Fizaine, Florian, 2018. "Toward generalization of futures contracts for raw materials: A probabilistic answer applied to metal markets," Resources Policy, Elsevier, vol. 59(C), pages 379-388.
    20. Ludwig, Michael, 2019. "Speculation and its impact on liquidity in commodity markets," Resources Policy, Elsevier, vol. 61(C), pages 532-547.

    More about this item

    Keywords

    Futures; Derivatives; Futures commission merchant; Segregated funds; Regulation; CFTC;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jocoma:v:18:y:2020:i:c:s240585131930008x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcomm .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.