Last week Nomura announced they were exiting the swaps client clearing business in the US and EMEA. They join a list of other institutions that have also left – RBS, BNY Mellon and State Street. Some have argued this means that the regulatory framework is simply too expensive and cumbersome. Others have suggested that this is more basic: covering the fixed costs when market share is low simply is not sustainable.
Nomura’s clearing market share, expressed as a percentage of the “Amount Required to be Segregated for Cleared Swaps Customers” for the top 16 clearers doesn’t look like it ever was above 1%. This information comes from the National Futures Association website and is published twice a month. In December 2013 Nomura’s Required Collateral for client swaps was $20 mm. The top 3 FCMs at the time held required client collateral of $13.136 billion. In April 2015 Nomura’s figure was $29 mlllion. The top 3 FCMs had $24.37 billion in required client collateral.
Comparing required client collateral across the top 16 FCMs, in December 2013 the figure was $26.060 billion. By April 2015 it had grown to $52.129 billion. We have written that the earlier numbers seemed pretty low in an environment when there were reports claiming $2 trillion in client margin calls coming down the pike. See out post dated September 4, 2014 “Required Collateral on Cleared Derivatives at FCMs has been growing, but overall numbers remain remarkably low” and May 5, 2014 “A look at recent Required Reserves for Cleared Derivatives Trades numbers — they still look small”. We know that the required reserve for client swaps figure doesn’t cover all derivatives – not even close. But we still think getting to $2 trillion will be pretty hard (along with it the massive collateral shortages that could come from these enormous margin demands). But we digress.
So who else is faced with the same situation: a clearing business with low market share? The top five FCMs, measured by required cleared swaps collateral (in $ millions) as of the end of April 2015 were:
- Credit Suisse Securities USA LLC $11,454
- Citigroup Global Markets Inc. $6,483
- JPM Securities LLC $6,433
- Barclays Capital Inc. $5,893
- Morgan Stanley & Co LLC $5,296
At the bottom of the list are:
- UBS Securities LLC $1,095
- HSBC Securities USA Inc $852
- BNP Paribas Securities Corp $638
We don’t know if these banks will join Nomura, State Street, BNY Mellon and RBS or not. We hope that the market does not shrink to just a handful of FCMs. Beyond the need to have multiple FCM relationships in order to port trades should the need arise, less competition often means higher costs, worse service and less innovation. That would be a shame.