INTL FCStone physical metals team leaving for Vision -sources

05/02/2013

* FCStone to cut exposure to high-risk, capital-intensive ops

* Addition would be Vision's first foray into physical metals

* Timing of move not known

By Josephine Mason

NEW YORK, May 2 (Reuters) - INTL FCStone Inc's physical metals trading team plans to leave for a smaller, rival futures broker as the midsize commodities brokerage cuts its exposure to the capital-intensive business, three sources familiar with the matter said.

The team, run by James Mammone and dealing in copper, lead and scrap metal, is expected to join U.S. futures commission merchant Vision Financial Markets, said the sources, who requested anonymity as they were not authorized to speak to the media.

The timing of the move is not known and the book is considered only a small portion of total revenue, which was $122 million in the first fiscal quarter to the end of December last year.

But the departure, effectively closing the physical base metals desk, is another sign that banks and derivatives brokers are reining in exposure to the capital-intensive and high-risk business to focus on futures broking.

As agents between metal suppliers and end-users, such as copper wire makers and lead-acid battery manufacturers, traders carry hefty financing costs on behalf of their customers.

Futures brokers execute and clear futures deals for commercial hedgers such as copper fabricators and grain elevators. That business has suffered from stiff competition and low fees.

INTL FCStone's exit from the physical business comes almost 18 months after it transformed its metals business by scooping up MF Global's former metals team.

At the time, it did not even have the technology in place for its 50 new staff, a number that made it one of the largest players by headcount on the London Metal Exchange market.

Buying the MF Global team also gave the company LME ringdealing membership, which means it can trade in the ring, the exchange's open-outcry trading floor.

INTL FCStone and Vision declined to comment. FCStone will publish results for its second quarter to end-March on May 8.

For privately owned Vision, the move would be its first foray into physical metals and diversify its offering beyond research and trading to create a "one-stop shop", one of the sources said. Vision has offices in New York, Chicago and Stamford, Connecticut.

Based on customer funds, Vision is much smaller than FCStone. The former held $627 million in customer funds in segregated accounts at the end of February, according to the most recent U.S. Commodity Futures Trading Commission data.

That compares with $1.45 billion held in FCStone accounts. Goldman Sachs , one of the world's biggest clearers, had $19 billion in customer funds.

The seven-strong team includes Andrew Knauf, Chris Walls and Dan Buonomo in New York; Joel Shanker, who trades scrap in St Louis, Missouri; and Yingjie He and Jacob Shen in Shanghai, according to the company's website. The move is not expected to affect the physical precious metals trading business.

TRANSFORMATION

INTL FCStone Chief Executive Sean O'Connor has built the company, whose roots go back almost a century, through a series of acquisitions as well as organic growth. The biggest of those deals was the takeover of FCStone by International Assets Holding Corp in 2009.

INTL FCStone's core focus is offering hedging facilities to midsize commercial hedgers and advice on managing price risk. It also offers access to capital markets and foreign exchange.

Commodity futures brokers suffered though as scandals surrounding the collapse of MF Global and Peregrine Financial Group knocked customer confidence and hurt trading volumes for brokerages.

Even before those crises, brokers were struggling with falling commission fees amid stiff competition for business. Historically low interest rates have also deprived them of the revenue they used to earn on the cash in customer accounts.

Legal costs to comply with tighter regulation have increased, hurting margins further.

"With all the regulations, it's very hard to keep a physical team going in a regulated brokerage so they wanted to split," another one of the sources said.



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