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Industry Spotlight > Clearing and Custodial Firms

A Notch Higher

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For a few years now, consolidation and regulatory scrutiny have been the buzzwords in the clearing business, but executives at clearing firms say another trend that’s taking center stage of late–and will be a major factor in the competitive equation–is broker/dealers’ call for clearing firms to be their strategic partners. “It’s not just clearing anymore,” says Norm Malo, CEO and president of National Financial, Fidelity’s clearing arm. Unlike five years ago, broker/dealers now want to do business with a clearing firm that can provide them with “an integrated package of products and services,” he says, and can help them “grow their business, recruit, reduce costs, and manage risk.”

Indeed, the competitive bar for clearing firms in attracting and retaining broker/dealer clients has “moved higher” than just providing cutting-edge technology and products, says Jim Crowley, managing director of Pershing, the big clearing firm based in Jersey City. Before aligning with a clearing firm, introducing B/Ds are first assessing “the stability, longevity, and expertise of the management teams running these organizations,” Crowley says. B/Ds want to know: “Are these people going to be here tomorrow?” Also, he says, they want to know if the clearing firm is the right business partner to “deliver the solutions that the broker/dealer, advisor, and [end] clients need.”

Staying ahead of the competition and heeding broker/dealers’ siren call is manageable for big clearing firms like Pershing and National Financial, but Malo predicts that smaller firms and those firms doing clearing on the side will ultimately go out of business or be bought out. In the mid-1980s, one could count 165 clearing firms, he notes. Today, however, that number has dwindled to 60 (there are 17 clearing firms in our annual directory), and within only a few years, Malo predicts it will drop to 30 or 40. Clearing firms must have the capital to invest in technology that’s needed to keep pace with more regulations and to provide advisors with the financial planning tools they need in order to transition from transactions to fees. Clearing firms must also “have capacity and volume because the pricing for clearing has been driven down, so all of [the firms'] spreads have been squeezed,” Malo says. “It’s truly a buyer’s market out there because all of us are trying to compete on price. If you don’t compete, you won’t get the business.”

Hands-On Educational Service

National Financial is staying ahead of the pack by offering hands-on services to brokerage firms through product consultants, who provide face-to-face training on, for instance, how to use managed accounts to “grow their business, effectively compete with wirehouses, and attract high-net-worth clients,” Malo says. National Financial held its first “rep training” program of this kind in September, with more tutoring sessions on the way. “We had over 100 producers from a multitude of different companies” attend the first training session, he says. Pershing, too, is investing heavily in technology and products to help introducing B/Ds capture more fee-based business, Crowley says. Pershing is also “sharing the technology that we have so that advisors can conduct a fee-based business,” he says.

Of course, the regulatory environment continues to be a thorn in clearing firms’ sides. Like other firms, National Financial’s technology budget has been steadily increasing, says Malo, to comply with regs like the books and records rule. This year, NASD rules 3012 and 3013, which require firms to have internal controls, will go into effect. Under the supervisory aspects of the rules, the CEO is responsible for signing off on “everything associated with the business,” Malo says. “That’s a big change. The CEO is now held responsible, and can be held liable if something happens.” Then there’s the implementation of Reg NMS, or National Markets System. Thomas Franko, Pershing’s general counsel, says the clearing firm has a “task force hard at work on the impact of NMS.”

The know-your-customer provision of the anti-money laundering rules is a “very complex area” too, Franko says, in the sense that it “entails knowledge of many of the relationships that we deal with in terms of introducing B/Ds themselves, and in providing tools to those B/Ds so that they can do their own anti-money laundering work.” Also, “as the markets become more complex,” Franko says, Pershing has to be more cognizant of the tools B/Ds need to report trades under Oats, Trace, and MSRB. Getting up to speed with the New York Stock Exchange’s Electronic Blue Sheet (EMS) trade reporting system, which requires “being able to have a very clear record of where the trade came from and the nature of the trade,” is also a priority for Pershing, he says.

Finally, Pershing is brushing up on foreign markets and foreign regulations, Franko says, as the firm’s “ability to transact business in those markets is becoming a bigger and bigger part of our business.” Pershing’s focus is on its ability to service introducing brokers in other countries “and understanding how business is conducted in various foreign jurisdictions, how their regulatory schemes work,” he says.

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Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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