Regulation Strangulation

So, here’s a quick rundown of applicable regulations to registered entities based on review of four regulators (CME/CFTC/ICE/NFA):

  1. FCM: 1,457
  2. IB: 847
  3. CTA: 566
  4. CPO: 659
  5. Swap Dealer: 705
  6. DCM: 320
  7. SEF: 258
  8. MSP: 673
  9. DCO: 457

Is it any surprise that there are fewer FCMs?  If cost is a basic function of (# of regulations) x (spend per line item), it’s obvious that the clearing firm community would shrink (and will continue to do so).  We conducted a little research and concluded that the approximately $6.4-billion spend on regulatory compliance in the derivatives sector—calculated based on industry statistics—can be split amongst the 6,500 active derivatives firms and the total number of obligations we have (4,146).

Accordingly, each line item costs the industry $1.54 million, or $237 per firm per line item. In the case of a clearing firm, this means the cost is about (237) x (547 more rules than an IB) = $130,000 more in compliance costs than another firm!  (Note: These are not weighted by complexity of rule, so it’s pure numerical analysis—weighting would likely skew the numbers on a marginal basis up or down).

fcmbloggraph

While we’re careful not to draw conclusions of causation vs. correlation, the anecdotal evidence is astounding:  there are 1,457 obligations on clearing firms—far more than clearinghouses, SEFs, and actual exchanges.  By constraining these middlemen, we are placing a bottleneck on the financial services supply chain:

fcm

By isolating that single entity and not being thoughtful about regulation and the implicit costs (which should be aggregated here based on our calculation), there is little surprise that the number of clearing firms is decreasing at an alarming rate.  That’s why we do what we do:  our software helps these firms track and manage their regulations more efficiently—saving time, saving money, and reducing risk.

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