Bank Shakeups Recast Correspondent Clearing
Crisis shines spotlight on widening services
February 16, 2009
Over the last several years, correspondent clearing firms have broadened the services they offer--an expansion that has been welcomed by today's cash-strapped broker-dealers. But last year's bank implosions and government-assisted acquisitions are helping to resculpt the clearing industry.
When revenues are tight, more efficient operations become paramount. "Margins are under pressure, so you look to cut costs and improve services to keep existing clients and attract new clients," said Howard Abner, chairman of Abner Herrman & Brock, an asset management firm that operates its own broker-dealer. That approach, he added, applies as much to clearers as it does the brokers they support.
Abner's Jersey City, N.J.-based firm faced a choice last spring when its clearer, Bear Stearns, was rescued from imminent bankruptcy by regulators that arranged its acquisition by JP Morgan Chase & Co. Abner chose to stay put. Since then the clearing unit has received significant investments from its new parent and is now part of one of the few major banks that boasts capital strength and a double-digit stock price.
Correspondents of Bank of New York Mellon Corp.'s Pershing subsidiary and Broadridge Financial Solution's Ridge Clearing & Outsourcing Solutions may feel similarly confident, at least for now. Broker-dealers clearing through Merrill Lynch & Co.'s two clearing units--Broadcort and Merrill Lynch Professional Clearing--could have more concerns, given that the firm's new owner, Bank of America Corp., has seen its stock price drop precipitously since mid-January. The Charlotte-based banking giant, which declined to comment for this article, was forced by regulators in 2004 to sell two clearing businesses due to mutual fund market-timing issues.
Some clients of Fidelity Investments' National Financial Services (NFS) unit may also have concerns. NFS is expected to lose the business of JP Morgan's brokerage arm as well as that of Washington Mutual--which JP Morgan bought in September--because along with Bear, the New York bank acquired the ability to clear in-house. The firm also stands to lose Bank of America's vast brokerage division, given its deal for Merrill.
In addition, National Financial CEO Norm Malo, who led the development of the clearer's well-respected technology platform and its rapid growth over the last six years, is retiring at the end of March. Typically, changes unnerve correspondents, prompting questions about whether a clearing subsidiary will continue to receive the same level of attention and financial backing from its owner.
NFS Grows
NFS's business, however, does not appear to be slowing. John Phillips, EVP of sales at National Financial, said the clearer signed on 20 new clients in 2008, despite the kind of market volatility that is more likely to cause firms to focus on their customers than make back-office changes. Broker-dealer inquiries about NFS's services rose 40 percent in the fourth quarter compared to the same period a year ago. "A large percentage of that increase was from start-up broker-dealers--new firms entering the market," Phillips said.
Both prospective and existing correspondents have recently demanded more support in recruiting broker clients and transparency about NFS's financial health, including metrics such as net capital and trade volumes, noted Phillips. "Some of the strength of our organization has been behind the scenes historically," he said. "Now it's become more important in the recruiting process."
In that regard, the former Bear Stearns' correspondents may be among the most fortunate, since JP Morgan has a long track record as a global custodian. Abner said investment advisers tend to hold assets at big names, such as Bank of America's U.S. Trust, Northern Trust Corp. and State Street Corp., which produces an additional fee for customers. Custody is now a part of Abner Herrman's clearing relationship. "I can tell a client that his assets are going to be at JP Morgan, and he's not going to be charged a custodial fee," Abner said. "You get a bit more credibility, if you will, with JP Morgan's name."
