INTL FCStone, which owns one of the largest independent futures brokers in the U.S., has set its sights on Asia. On March 19, the firm announced a deal with Singapore's United Overseas Bank to buy its futures trading and clearing business. Once the deal closes, INTL FCStone plans to establish a full-service brokerage in Singapore and use it as the foundation for expanding its presence in the region.
The firm currently has approximately 80 people working in Hong Kong, Shanghai, Singapore and Sydney, but those offices mainly serve to introduce clients to the firm's European and U.S. brokerages. This deal will give INTL FCStone the critical mass to set up a third hub in Singapore, allowing it to offer a full set of solutions to clients in the region.
Philip Smith, INTL FCStone's chief executive officer for Europe, Middle East, Africa and Asia, explained that his firm used its London subsidiary as a platform for building its European business and now plans to pursue the same strategy in Asia, using Singapore as a springboard to the rest of the region.
"Asia has been the smallest part of our business from a headcount and a revenue perspective," Smith said in an interview with MarketVoice. "If you look at our growth and the acquisitions we've made over the last 10 years, we've gradually leveraged the original clearing brokerage services that we have in the U.S. and expanded our capabilities in Europe out of our headquarters in London. We have grown significantly over the last 10 years in terms of balance sheet, profitability, clients, headcount, whatever metric you prefer. Now we are looking at this as the opportunity to do the same in Asia."
Focus on Institutional Business
At the heart of the deal is a well-established futures brokerage and clearing business that UOB established in 1978. Under the terms of the transaction, INTL FCStone will acquire the accounts of approximately 300 institutional clients located in Singapore and other parts of Asia. UOB also serves retail customers, but those accounts will not be part of this deal.
For INTL FCStone, the onboarding of this institutional business will greatly accelerate its expansion in the region. "We see this as a huge opportunity for us to leapfrog many years of organic growth," Smith said.
The transaction is only an asset sale, however, and does not involve the acquisition of an existing entity with regulatory licenses and exchange memberships. INTL FCStone therefore needs regulatory approval from the Monetary Authority of Singapore to set up a local clearing firm. That will pave the way for the firm to become a full trading and clearing member of the Singapore Exchange.
Currently the firm is not a member of any exchanges in the Asia-Pacific region. Instead it offers access to those exchanges indirectly, i.e., through relationships with other brokers. However, once the deal with UOB is completed and the clients have been onboarded, Smith said the firm may seek clearing memberships beyond Singapore if there is sufficient volume. That was the model it pursued in Europe, and today its London entity clears trades at Eurex, the London Metal Exchange and the Paris and Amsterdam branches of Euronext.
Industry Trend
Other non-bank futures brokers are also spreading their wings. On March 12, R.J. O'Brien, the largest non-bank futures broker in the U.S., announced plans to open a new office in Paris, its first in continental Europe, and added that it is looking to hire additional brokers to support its expansion.
The firm already does a substantial amount of business in Europe through its U.K. subsidiary, R.J. O'Brien Ltd., which was founded in 2011. RJO stepped up that business substantially in 2015, when it bought the Kyte Group, one of the leading clearing firms in the U.K. futures market, from GFI Group.
Gerald Corcoran, the company's chairman and chief executive officer, said that RJO achieved record revenues and profits for 2018 and hinted that more acquisitions may be coming. "The next couple of years will be exciting as we expect to continue on the path of acquisition and innovation," he said in the March 12 announcement.
Marex Spectron, one of the largest non-bank futures brokers in the U.K., is also investing in expansion. On Feb. 4, it completed the acquisition of Chicago-based Rosenthal Collins Group, one of the best-known non-bank futures brokers in the U.S. Ian Lowitt, the company's CEO, said that the deal will bring together two very complementary businesses and highlighted their combined strengths in commodity futures markets. “This was an opportunity to obtain a great franchise with massive strength in grains and livestock,” Lowitt said in a recent interview with MarketVoice.
Serving the Commodities Markets
The common thread for all three firms is that they are expanding at a time when many larger bank-owned brokers are cutting back on the business. The implementation of new capital requirements after the financial crisis has changed the economics of the clearing business for banks, and in some cases bank-owned clearing firms have off-boarded clients that they cannot continue to serve profitably.
This is particularly true with clients trading commodity futures and options, which are subject to a higher risk weighting in the capital rules than financial contracts. That has created an opening for the non-bank brokers to expand their offerings and pursue clients looking for a new home.
"We see this as a huge opportunity for us to leapfrog many years of organic growth."
Philip Smith, CEO for Europe, Middle East, Africa and Asia, INTL FCStone
Marex Spectron says it ranks as the top broker for metals contracts traded on the LME by volume and top three in its core energy products. In agriculture it specializes in cocoa, coffee, grains and sugar traded on European exchanges, and now with the addition of Rosenthal Collins and its U.S. franchise it will have an even stronger position in agricultural markets. INTL FCStone gets the majority of its revenues from the agricultural sector, but it is also a ring-dealing member of the LME, and in 2017 it bought a European oil brokerage business from ICAP to augment its offering in the energy markets.
The non-bank brokers do not have the balance sheet and the range of financial services that the banks can offer large institutions, but they are filling a gap in the middle of the market. INTL FC Stone advertises itself as serving "mid-market" customers such as commercial hedgers and smaller hedge funds and commodity trading advisors, and calls itself a "natural home" for customers exiting the banks.
In the U.S., its home market, roughly two-thirds of its revenues come from agricultural clients that use the firm to provide advice on hedging strategies and execute and clear their trades, and the business has been steadily growing. According to statistics published by the Commodity Futures Trading Commission, the U.S. subsidiary ended 2018 with $2.15 billion in collateral posted by clients trading futures and options, up 27% over the last five years. That compares to a 15% growth rate for the industry as a whole over the same timeframe.
