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February 22, 2010

Penson Moves Up in the Clearing Competition

By Editorial Staff

Penson now claims to be the number-two clearing firm in the business. It made the claim on the basis of a recent deal with one of its competitors, which adds 100 correspondents with about $75 million in annualized net revenue.

Penson said the stock-and-cash deal happened when Broadridge Financial Solutions officials disclosed that they were ready to sell some of the business and enter into an alliance.

That's part of what drove Penson's recent purchase of Broadridge's clearing contracts. Broadridge's clearing business had been run through its Ridge Clearing operation, but it was in the red.

"This transaction came about as a result of a technology deal we were working on with the Broadridge Technology subsidiary in Canada," Penson CEO Philip Pendergraft told CQ&D.

"It really grew from that into a bigger transaction," he added. Broadridge officials, Pendergraft noted, said that their outsourcing business has been expanding so much that they concluded that they didn't need clearing anymore.

Penson says it is now the number-two clearing brokerage. It now counts some 415 correspondents.

That puts it ahead of Fidelity Investments' National Financial and behind the Bank of New York Mellon's Pershing, said Penson Financial officials. Pershing has some 900 clients, according to Aite Group, an industry consultant.

A National Financial spokesman said it has some 300 correspondents, but it doesn't discuss competitors. Some clearing industry observers suggest that the number of correspondents a firm has isn't nearly as important as the quality of the clients.

Doug Dannemiller, an analyst with Aite, said the Penson purchase is "a good deal for both parties." But he added that even with the acquisition, Penson would have about "one quarter" of National Financial's some $500 billion in assets under custodianship.

But Pendergraft said Penson would continue to look for more acquisitions. He said numerous clearing firms are under pressure, owing to low interest rates and light trading volume.

As part of the deal, Penson also signed a technology deal with Broadridge. Broadridge will provide outsourcing functions for Penson clearing brokerages in the United States, Canada and the United Kingdom.

Penson officials argued that since their firm is basically a clearing-only business, it would make sense for Broadridge to sell clearing and concentrate on selling outsourcing services to Penson and others.

"It's really a win-win for both of us. We get to grow our clearing business, and they get to grow their technology outsourcing business," Pendergraft said.

Ridge Clearing will continue as a unit of Broadridge, but it will cease offering clearing services. It will only sell outsourcing services.

At the same time, Penson and Broadridge also entered into an alliance, agreeing to sell each other's services to customers on a global basis.

So at least two reasons drove Broadridge's strategic decision. First, the company has been losing money on its clearing operations over the last few quarters. Second, Broadridge, which was spun off by Automatic Data Processing, saw better opportunities in other lines, such as securities processing.

"The Penson transaction," Broadridge CEO Richard J. Daly wrote in a letter to shareholders, "creates considerable momentum for our securities processing strategy. It will enable us to have the use of significant free cash that had previously been restricted, will eliminate the balance-sheet risk associated with the clearing business, and will provide us with a clear strategy for our securities processing business, which now includes outsourcing."

Besides supplying processing services for former competitor Penson, Broadridge also recently announced it had signed a deal with Morgan Stanley Smith Barney.

Broadridge will provide customer communication services for Morgan Stanley. These will include the production and distribution of account statements, performance reports and tax report documents.


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