Clear Street has applied to the US futures regulator for approval to launch a futures clearing broker next year focused on the main US and then European markets, part of the ambitious US firm’s plan to develop a multi-asset prime broking service.
New York-based Clear Street has applied to the National Futures Association (NFA) for permission to launch a futures commission merchant (FCM) and start offering futures clearing services to trading firms.
The application has emerged ten days after Clear Street acquired React Consulting Services and detailed its plan to integrate React’s flagship platform BASIS into its own infrastructure and use that to offer futures clearing.
Andy Volz, the chief operating officer of Clear Street, told Global Investor: “To date, we’ve only been a US equity and option firm. That was until a month ago when we launched fixed income. So we have built the platform on US equities and options, we have made it scalable and flexible enough to handle new asset classes and we are now adding new asset classes with fixed income, futures and, after that, international.”
He continued: “We will work to transition the BASIS platform into Clear Street and our underlying systems so BASIS will be fully integrated as the futures clearing component of our FCM build which is also currently going through FCM approval with the NFA.”
Clear Street, which raised in April $435m (£331m) in a Series B funding round which values the company at $2bn, is a technology firm that has until now developed its own systems but the React deal was attractive partly because it will reduce Clear Street’s time to market.
Volz said: “On the regulatory side, obviously we are at their discretion, but we would like to be transacting business by early next year, which is as much about the technology integration as the approval.”
The Clear Street COO added: “In terms of the markets we will offer, we are looking at all of the major US futures exchanges and a few in the UK and Europe. We hope the integration of the futures exchanges will begin early next year. Ultimately, we aim to be a broad-based FCM and hope to be able to move quickly in our addition of exchanges.”
Volz said the firm has identified what he calls “an underserved client base” which has emerged in recent years as some banks have quit prime broking.
He said: “In addition to the banks that have pulled out, there are others that have pulled back to service only the top 100-200 hedge funds, leaving everything below that - from the start-ups to the $500m and $1bn dollar hedge funds - really underserved.”
Volz believes banks are struggling to make prime pay due to outdated technology and regulation that requires banks in particular to set aside capital against risky client assets sitting on their books.
He added: “A lot of the equity long/short hedge funds were asking us for fixed income so we have delivered that and they were also asking us for futures. Hedge funds in London have also been asking us to move into that market because they have had a bigger drain on the number of providers than even the US has.”
Credit Suisse started to close down its prime broking arm in late 2021 citing losses from the Archegos default and Deutsche Bank completed in early 2022 the transfer of its prime finance division to BNP Paribas.
Volz said the integration of the React Consulting Services technology is the next key step before moving outside of its home market.
He said: “Once BASIS is integrated, we will have US equities and options, fixed income including corporates, convertibles, treasuries and futures, but we still want to expand globally so that will be our next push. We don’t do anything today outside the US. The plan is to expand to the UK and Europe first, then Asia, and other developed and emerging markets.”
The prospect of a new futures clearing broker is interesting because the number of US-registered FCMs has dropped significantly in recent years from over 190 firms before the 2008 financial crisis to just 59 in July 2023, according to data from trade body the FIA.
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