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Some Like It Hedged

BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

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April 21, 2005

Shifting Paradigms for Profits

By Desmond MacRae

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Global Services and Multiple Products

It's the best of times and the worst of times for correspondent clearing firms.

The good news is that U.S. clearing firms are gaining more volume by going global. New client segments have emerged. Different types of securities are appearing. Technology is improving. All of this offers opportunities to earn more profits.

The bad news is the blurring of the traditional lines between correspondent clearers and global custodians. New competitors are appearing while consolidation continues. And profit margins continue to shrink.

Nevertheless, correspondent clearing firms can prosper, analysts say. And, in an era of more creative destruction, that sort of stability is welcomed by trading firms and other correspondent customers. "The key words, much overused but still most important, are partnership and value," according to Jim Crowley, a managing director at Pershing. Crowley says a correspondent clearing firm must "want to bring value to that partnership by performing the functions the customers outsource to us more efficiently so that they can focus on their core competencies."

Crowley adds that most clearing firms can clear, settle, process dividends, keep records, send and receive wires and checks. They can also provide clients with timely statements. But clients now want more, including unbundled product offerings that are flexible enough to be customized.

Value means some firms must reinvent themselves, says an industry expert.

"What has changed is the roles that some firms are choosing to play," says Matthew Bienfang, a senior analyst with

TowerGroup in Needham, Massachusetts. Firms are redefining their focus on the clearing business. In fact, last November ADP bought U.S. Clearing and another firm from Bank of America. ADP's goal is to add the outsourcing of securities services to its core business of payroll, benefits, retirement and human resources services.

So does this mean self-clearing has finally become a dinosaur?

"There are a few companies that can enable firms to go back to the self-clearing model, or at least appear to," Bienfang says. And as for how clearing firms see the world, multiple choices are now available.

Three Models

Clearing firms, officials say, can now facilitate three models.

"Self-clearing firms want fixed costs for people and technology," according to Joe Barra, president of ADP Clearing and Outsourcing Services. "Some of them now want to move some tasks into a variable-cost structure."

The second model outsources entire functions such as cashiering, human resources, licensing and registrations. The third model is where firms "move onto our platform, and we do all the operations and support services," Barra explains.

Customized service is important. Newer client segments want sophisticated services. There is growing investor demand for securities other than traditional equities. Regulatory requirements are increasing.

"Some clients want a distributed operating model with tools that will allow their investment professionals to input transactions, have them read by home office rules engines for review and approval, then delivered directly to us," Crowley explains.

But these services must be provided around the world, says another executive.