Can you share the latest merger details?

TK: I’m afraid I am not supposed to talk about it and therefore can not give any details.

Picking up on the themes of the conference, the importance of clearing seems to have been stressed heavily. Fimat has recently been involved in the RV default, so how much risk do non clearing members pose to brokerages?

TK: With any customer that we absorb part of what we are paid for is to be an intermediary between the clearinghouse and the clients. So, we always face some risks. But we have a robust risk department in each geographical zone and a centralised risk function in the corporate headquarters. After this meeting I have to rush off to another in our credit department! I think we take the process of evaluating our clients very seriously. It is certainly the case that the exchanges seem to like having us as the intermediary between them and the client to minimise that credit risk exposure.

In your opinion are the algorithms that form the basis of a vast amount of trading cause adding to the risks FCMs now face and are measures such as Eurex’s ‘stop’ button a positive step in the risk management process?

TK: I’m not sure I know enough about Eurex is doing to comment on that. But do I think algorithmic traders present undue risk to us? Not necessarily. The same core tenants that go into the usual credit evaluation process still apply when dealing with algorithmic traders. That means know your customer and know more than the balance sheet. Know who the principles are, know their trading styles and know what their history has been. These things are most important in the credit evaluation process and that is an important part of running the brokerage business. The algorithmic traders present a new set of metrics that you have to think about but they are not worse [than traditional traders] or presenting dangers to us unduly.

What is the biggest growing sector of your business?

TK: We are a multi-faceted broker dealer and we have experienced growth across many of our business lines. Our commodity business has been doing very well as has our professional trading group clearing business. That section was reorganised earlier in the year. Other than that, our hedge fund business continues to show strong growth and we are very pleased, particularly in the US, with the growth of our equities business. We have introduced the concept of portfolio margining to a number of clients as we were an early adapter of that.

Is that still having teething problems?

TK: No we don’t think so. It is completely out of the pilot program; the rules are out there. We spent a lot of money on risk and clearing systems to support that business and it is growing very well. We are doing a good job with our equity clients and particularly those who want to trade equities and equity options. We are very excited about other aspects of our equities business that are going on. We have an ETF creation team in New York and that is going well. You’re witnessing the futures and options exchange volume increases and that translates to volume growth for us.

And do you think exchanges listen enough to the needs to brokerages like yourself?  

TK: They are trying to run a for-profit, shareholder driven organisation as well. I feel as though they listen, yes. Is it enough? That depends on the issue and one’s own interpretation and standpoint. But I think that one of the things that is apparent is that the business is in a changing environment. Both the intermediaries and the exchanges need to co exist. We will look back at this time as a period when the relationship went through some shifts and I think those changes are is still evolving. But for the most part, exchanges do listen although our interests aren’t always going to be aligned.

There has been a lot of consolidation on the exchange side. On the brokerage side, Fimat is joining with Calyon. Do you anticipate more of this within the FCM space?  

TK: My own impression is that there will be some further consolidation down the line, I don’t think we’re done yet. I have been in this business for twenty years and what I have seen is the large intermediaries and investment banks coming into this business. Now many of the banks are going through their own mergers which translates to mergers at the FCM level. Take our friends at Credit Agricole. Calyon is the result of the merger between Credit Agricole Indosuex and Credit Lyonnais. Is that an FCM consolidation? Not in my mind, that is a bank consolidation and the FCMs came along with it. What will happen to some of these larger organisations after the fallout from the mortgage market? We are still waiting to see.

Has the credit squeeze affected your business on a day to day basis?

TK: In the short term it has probably increased business because there is truly a flight to hedging. However, it was interesting that one of the commentators in my panel today said that the real question may come if there is a reduction in the origination business on the mortgage side business and the CDO market. That could very possibly have a long term decrease on exchange traded business. I had not thought about that before.

Do you think the exchanges have coped well with the spikes that they have witnessed recently?

TK: Yes I do think thy have coped well. But what is a more interesting story is about what the firms have gone through. Quite frankly, the exchange clearinghouse can only be as timely with their output as the worst clearing member is with their input. We have spent money over the last five years growing our capacity for volumes. We expected volumes to increase and still expect them to rise significantly. Now, that investment has paid off because we are able to process our trades in a very timely manner with a huge number of transactions that seemed unthinkable five years ago. It is that very investment that one has to continue to do in both the operating systems and risk systems. This process presents challenges to a number of clearers that and that might be one driver behind more consolidation

Do you think brokerages do enough due diligence on the credit risk of new clients? Do these parameters change when you are sourcing business from emerging markets?

TK: I think Fimat [now Newedge] does a pretty good job and I think brokerages in general do as well. There are a set of financial safe guards around our business, for example, the daily margining system, that the business revolves around. I think they work pretty well. I don’t know if all of our competitors do as much due diligence as we do but I think customers appreciate the fact that we do our due diligence. When we talk to our customers one of the things that we point out is that we ask everyone the same questions that helps makes their deposits with us safer.

And are there any areas geographically which you are expanding into?

TK: We did a big acquisition in Japan when we bought Himawari. I’m really excited about that and the expansion of our equities and professional trading group businesses. I’m also excited about our stock leading business that has been growing significantly. In terms of location, Fimat has always been fast at getting a presence so we are pretty well situated geographically.