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Clearing Firms Extend Their Outsourcing Businesses
January 1, 2007
"There's a huge market now for imaging and workflow," Honoré said. "But it's so expensive to implement at smaller firms that I think outsourcing the service is a really smart bet on Pershing's part, especially if it can make the process very simple." He added that major broker-dealers such as Merrill Lynch & Co. already convert documents into electronic form by requiring their reps to mail all of their forms to processing centers for scanning. Pershing is offering smaller firms the same benefits.
"It's not just about providing an imaging service, but meeting the record retention challenge and beefing up compliance and risk supervision processes," said Jim Crowley, managing director at Pershing. "This provides the adviser with a more efficient way to do business."
Pershing is also adding services to bolster its clearing business. It has worked informally with a few customers to expand the data it collects for them beyond securities trades, such as in banking and insurance. Pershing will provide a comprehensive view of sales-related data, such as commissions across business and product lines, and by branch and region. "The goal is to consolidate the data into one data warehouse, and then provide consolidated reporting about those activities," said Crowley.
Such services aim to automate tasks that were once performed by reps or by a broker-dealer's own back office. Outsourcing allows correspondents to focus on their core competency of brokering investment transactions.
ADP's Hybrid
In a fully disclosed clearing relationship, broker-dealers outsource most of their back office, while self-clearing firms have tended to outsource only trade processing. Automatic Data Processing launched a hybrid service in 2005 to permit self-clearers to remain that way while outsourcing most back-office functions, such as street-side settlement and the status of fails, and the margin and cashiers desks.
"We think this is a sweet spot in the market right now," said Michael Alexander, EVP of operations at Roseland, N.J.-headquartered ADP, which gained initial traction by selling the hybrid service to retail-oriented TD Waterhouse (now part of TD Ameritrade Holding Corp.) and E-Trade Financial Corp. He added that the service enables broker-dealers to adapt quickly to wide swings in trade volume without having to adjust their own back-office personnel and systems. This flexibility should prove beneficial to high-volume firms catering to institutional customers, and ADP recently signed on such a firm, said Alexander.
On the institutional and professional trading front, Penson Worldwide of Dallas in November announced the acquisition of Chicago-based futures clearer Goldenberg Hehmeyer & Co. The acquisition rounds out Penson's ability to clear and execute trades in futures, options, equities and foreign exchange in light of the growing demand for multi-asset-class trading. Penson is now preparing to accommodate portfolio margin accounts, which are expected to receive Securities and Exchange Commission approval by year-end.
Portfolio margining will reduce the collateral requirements for customers trading in multiple asset classes. "It will increase existing customers' trading volumes, because it will provide qualifying customers with more realistic leverage requirements than current ones, and we think it will create additional opportunities among prospective customers," said Penson CEO Philip A. Pendergraft.
Penson builds much of its technology in-house, as do other clearers and correspondents that support their business strategies with customized and proprietary applications. But not even the largest clearers with long menus of technology services can meet every client need. As a result, clearing firms are increasingly offering their in-house development staffs to clients on an outsourced basis, and Pershing is considering how to offer the services of its software development unit based in India. "We're formalizing the infrastructure around this and plan to offer it more broadly to broker-dealers," Crowley said.
