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January 01, 2005 at 02:00 AM
Consolidation has been a major trend in the clearing business for a few years now, and it doesn’t show signs of abating. Clearing firms have been forced to devote huge sums of money to technology in order to comply with a deluge of new regulations, and some firms can’t afford to pony up the cash. In addition, it’s safe to say the Securities & Exchange Commission won’t stop issuing new rules anytime soon. “Regulators are ambitious,” says Rich Brueckner, CEO of Pershing, the big clearing firm based in Jersey City, New Jersey. “There will continue to be consolidation” among clearing firms because adhering to regulations requires new technology. Firms that offer clearing services “on the side,” and not as a core business, are suffering the most, Brueckner says.
Over the past year alone, clearing firms have added new technology to provide more disclosures on mutual fund breakpoints, to get up to speed with anti-money laundering procedures, as well as to comply with the SEC’s books and records rule. Now, Brueckner says he’s particularly interested in how the SEC’s revised Regulation NMS (National Market System), which would modernize rules for the U.S. stock market, will play out.
Brueckner says he “supports” the SEC’s efforts to strengthen the market structure, “particularly those initiatives that will benefit retail investors and their advisors.” He notes, however, that “any SEC mandated market structure changes must be done within a framework where competition between markets can continue to thrive.”
The SEC reissued the proposal for a 30-day comment period on December 15.
Technology to Stay Competitive
Linda Van Oosting, VP at Raymond James Correspondent Clearing, says complying with the National Association of Securities Dealer’s (NASD) disclosure rules on mutual fund breakpoints has required a huge amount of technology. The NASD claims that broker/dealers and mutual fund companies have failed, in some cases, to give the proper discounts to clients on purchases of mutual funds that are sold with front-end sales charges. Raymond James has developed technology, she says, to not only coordinate “efforts among our own firm’s systems, but work with collecting information from the mutual funds.” As a result of the breakpoints rule, “We need to look at how we can disseminate the information in the most practical manner not only to our sales force, but to our introducing firms in a way that’s meaningful to them.” Before any new technology can be implemented, however, senior management has to be willing to “allocate the resources” needed to support it, she says.
Donna Morris, executive VP of product management at National Financial, Fidelity Investments’ Boston-based clearing business, agrees that consolidation will continue for some time (hastened by Fidelity itself, which announced a deal Dec. 16 to acquire Fiserv’s clearing business: See Acquisitive Fidelity sidebar at right). Morris believes the increasing demands from broker/dealer clients for more products and services are also fueling consolidation. “The core capabilities of a clearing provider are really only a fraction of what clients want from firms like National Financial,” she says. “It’s not only the [technology] investment required to stay competitive in the clearing market, but it’s the investment, expertise, and resources that it takes to build out an offering that meets the demands of B/Ds.”
To stay competitive, clearing firms must help B/Ds streamline their operations, and offer technology platforms that can be easily integrated with the B/D’s technology, Morris says. “For a firm like Fidelity, one of the things we’re most focused on is integration.” When Fidelity partners “with a best-of-breed provider, how do we take that product or service and integrate it onto our platform so that it’s easily usable and deployable to our [B/D] clients?”
Building a Better Workstation
B/Ds are also looking for “a state-of-the-art workstation,” she says, as well as access to products like managed accounts to help B/Ds build a fee-based business. “The expectations of the B/D community are far greater than they were 10 years ago,” Morris says. “B/Ds are looking for a partner to help them grow their business, not to just execute their trades and custody their assets.”
To address B/Ds’ changing needs, National Financial has “made significant enhancements” to StreetScape, the firm’s browser-based tool used by the home office, representatives, and consumers. It’s now easier to navigate through StreetScape, Morris says, and brokers can also access market data from Reuters Plus. More research from firms like Prudential Financial and Lehman Brothers is now available on the StreetScape platform. Plus, StreetScape for Windows, “a client server application that was developed to meet the needs of reps that are managing a book of business,” is now in the pilot phase, she says.
