When it comes to firms that use clearance and settlement technology, Anthony Scianna, vice president of business development at SunGard Securities Processing, notices two things. First, "The market is not that good right now. People are looking to cut costs anyway they can."
Second, he notes, vendor management is becoming an issue, as financial institutions look to cutback on the number of technology firms they must deal with. A few years ago, he notes, firms "didn't want to put all their eggs into one basket" and readily used a variety of vendors. Today, he says, institutions favor having "a few large vendor relationships, as opposed to many." While that can be a risky strategy, it's a risk that "everyone's eyeing and deciding what's best for (his or her) firm. After Sept. 11, everyone is looking at these things a lot more than they were before."
Here are some examples of how firms are tackling the issue of clearing and settlement in this new reality.
Northern Looks to Pershing for State-of-the-Art Solutions
Terry Ransford understands the economics of self-clearing and settlement and that's why the senior vice president of ecommerce at Chicago-based Northern Trust Securities, Inc., a full-service broker, uses a correspondent-broker service for the task.
Ransford - who jokes that he has held "literally every job in the brokerage business" since joining management in 1984 and leaving behind his job as a broker - says that for self-clearing to make sense, a firm has to have a "minimum-daily-trading volume of 20,000 trades before it becomes reasonable to consider."
"Most firms aren't of that size" and have a "tough time hitting 20,000 trades a day." Moreover, he notes, that's just to break even; firms need more volume if they want to make it worthwhile and start clearing for others.
At least that's what Ransford learned a few years back, when his previous employer was merging some brokerage businesses it had acquired, and it is advice that still stands today, he says. The firms were clearing through different correspondents and his task was to figure out if it was cheaper for the combined firms to do it themselves. At 11,000 trades, he says, there wasn't "nearly enough volume," so clearing was consolidated at a correspondent broker.
Today with Northern, Ransford uses Pershing, a division of Donaldson, Lufkin Jenrette Securities Corp., to clear and settle trades at the firm, which is a full-service subsidiary of Northern Trust Corporation, a private bank known for its high-touch appeal among the wealthy.
The brokerage has a strong presence in the Midwest and Florida and targets clients with assets exceeding $5 million. The firm employs 100 people, 41 of whom are brokers. The firm's "longer-term goal is to have offices near 80 percent of our target market."
The banking parent also has some NASD licensed representatives. An Atlanta call center services self-directed accounts, such as 401(k) plans and employee-stock-purchase plans and Northern handles both retail and institutional business.
Ransford says it "costs a fortune just to stay abreast of the core clearing (technology)" and it takes a lot of capital to keep up with regulatory changes and build the next generation of technologies that the firm needs to service customers.
By using a correspondent, he says, the onus for maintaining that shifts to the provider, freeing up capital that can be spent to grow the business in other dimensions.
Pershing, he says, is "very good at blocking and tackling. In the securities business, clearance means everything. It's the simple things, not only trade execution but the ability to process dividend interest and corporate actions."
Your brokerage components, he says, "need to work, very, very smoothly," and one of Pershing's "strong suits" is its core-processing engine.
Northern also has access to "quality portfolio-appraisal statements," all of which combine to allow the firm to better serve its customers in a seamless fashion.
By using a correspondent broker, he says, he's able to obtain "state-of-the-art" technology, without the heavy cost of capital outlay needed to build and maintain it.
"Brokerage firms just can't compete. It's easier to pay a clearing firm, because they do that, than it is to do it yourself."
Brand Name Is Key for Perrin Holden
When it comes to clearing and settlement, Jody Eisenman worries about one thing - quality.
Eisenman is the chief executive officer and co-founder of Perrin, Holden, Davenport Capital Corp. in New York, a retail-brokerage and investment bank, which employs 50 people, including 35 brokers.
When he was shopping for a clearing firm six years ago, the date the firm was launched, Eisenman settled on BNY Clearing Services LLC, a subsidiary of the Bank of New York.
"They were very competitive in pricing and had a very good name in the industry. A lot of our business is overseas. Having a quality firm is extremely important to use. We could have gotten a clearing arrangement that would have been cheaper for us, but a quality name was worth the additional price."
Eisenman was looking for basic clearing and settlement and the firm didn't need additional bells and whistles that correspondent clearers are bringing to the table. For example, order execution is handled elsewhere, because it's cheaper.
He says Perrin Holden has between 50-150 proprietary trades daily so self-clearing was out of the question and there was no need for a service bureau, which would require additional staff and processing capability.
"Price and the name were very important to us." As well, because the firm deals with offshore clients, currency is a big issue and it needed a firm that could deal with money transfers and multiple currencies.
He says BNY "could handle that easily. We know these guys are very good at it and have the system down pat." The best part, he says, is, once the contract is signed, he doesn't have to worry about clearing and settlement till renewal time and can spend his time growing his business. "In between contract dates it's not something I deal with a lot."
Self-Clearing Means 'Big Commitment'
When it comes to self-clearing, firms need to go big or go home. That's what Fidelity Investments did when it decided to move into the correspondent-clearing business and leverage the systems it was building for self-clearing purposes.
"We made a commitment to move into the correspondent-clearing business," explains Bobbi Masiello, a senior vice president of the Fidelity Institutional Brokerage Group. "We had the knowledge and capability to do this."
Masiello says "it's a big commitment" for a firm to self-clear and clear for others. "There's a cost to getting in and maintaining a leadership position."
That price tag, she says, "scares some away."