Broker-Dealers Face More Pressure to Scrutinize Clearing Firms
The last 18 months have proved to be trying times for some broker-dealers as clearing firms have encountered service disruptions and consolidations.
According to an Aite Group LLC report, Best Practices for U.S. Brokers, clearing brokerage services have expanded over the past several years to include the management and operation of the introducing broker beyond clearance and settlement of trades, such as broker recruiting, compliance management and business consulting services. The retail fully disclosed clearing industry is now a $2.3 billion annual revenue market, the research firm said.
In profiling 16 clearing firms, Doug Dannemiller, senior analyst with Aite and author of the report, found that broker-dealers should conduct a "high-level" review every other year of clearing providers. However, a more detailed review should occur if any of the following conditions occur: current clearing contract has less than one year remaining, the strategic direction of the firm has changed or growth or profitability has stagnated.
Aite also said the consideration of hedging operational risk with a move to dual clearing, looking to reduce cost or improve cash flow, and stability of current clearing provider deteriorates from an operation, financial or strategic position are all conditions that may prompt a detailed review of clearing providers.