Broker-Dealers Need a Plan B for Clearing Relationship
May 4, 2009
In today's volatile environment, broker-dealers should conduct reviews of clearing brokers every other year so that they can switch clearers on short notice, says a new report from research firm Aite Group.
In addition to clearance and settlement, introducing brokers currently use clearing brokers for a wide range of functions such as compliance management, broker recruiting and business consulting, notes Aite. But even as the relationship has evolved, the past 18 months have seen numerous service disruptions, as some clearers have left the market and others have seen management turnover, says the study. Major changes include JP Morgan Chase & Co.'s acquisition of Bear Stearns and the disappearance of North American Clearing and Lehman Brothers.
Introducing brokers "need to be aware of alternatives, as opposed to being reactive," said Aite senior analyst Doug Dannemiller, who co-authored the study with research associate James Kang. They should "understand what they need from the clearing firm, then match up their goals with the capacity of the clearing firm," said Dannemiller. "Then step through a disciplined process--understand plan A, and develop a plan B."
In additional to the high-level biennial reviews, the report urges brokers to conduct a detailed review if their current clearing contract has less than a year left. Other reasons for such a review include a change in the broker's strategic direction, lack of growth or an effort to reduce costs-as well as instability at the clearing firm. Introducing brokers should "take control" of the clearing relationship, said Dannemiller, who advises that firms use a request-for-proposal approach rather than relying on clearers' marketing materials.
