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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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May 10, 2006

Clearers Offer New Flexibility To Meet: Trading Challenges

By John Hintze

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The quickly evolving financial markets seem to be bent on making traders' lives more difficult. Their pain, however, has not gone unnoticed: Clearing firms are aggressively building services to provide traders with new investment opportunities as well as more flexible ways to take advantage of the traditional ones.

On the trading front, electronic trading, new regs, decimalization, and increased competition from the likes of hedge funds have put pressure on spreads, and that's unlikely to lessen. In addition, the domestic market's humdrum performance in recent years has made profitable returns harder to come by here at home.

Those challenges on the front-end have pushed brokerages to find ways to cut trading costs on the back-end, making outsourcing options such as correspondent clearing more attractive. But even taking advantage of clearing firms' operational economies of scale has a flip side. In fully disclosed clearing relationships, broker-dealers typically have had to give up internal trading and financing functions such as stock lending, which provides a lucrative source of funding.

Faced by these dynamics, brokerages have pushed to find new trading strategies to bolster revenue, searching out new markets and finding more efficient ways to tap conventional ones. On the back-end they're still looking to outsource functions such as books and records and proxy voting that require costly manpower and technology if done in-house, but the pioneers are looking for more flexibility in what they can and can't do on their own. In fact, the time may soon arrive when a broker-dealer can clear trades through another firm but still retain its own revenue-generating stock loan desk.

Over There

On the trading strategy front, international funds provided a return of nearly 22 percent compared to a 13 percent for U.S. stock mutual funds in the 12 months before Feb. 28, according to Morningstar. More specifically, Latin American stock mutual funds returning nearly 63 percent in the same period, while the more mature Japanese funds jumped nearly 33 percent.

Investors, eager to grab those returns and diversify their holdings, have clamored for the more exotic paper, prompting broker-dealers to find better ways to meet their needs. Hearing the U.S. sell-side's call for help, a major French bank, Societe Generale, is in the process of building a correspondent clearing platform that tightly integrates cross-border clearing and execution services. The intent is to attract U.S. correspondents that already have significant cross-border activity by providing them with a competitive edge to attract client business.


Walt Koller, a managing director and former CEO of clearer Fiserv Securities, is heading up the initiative at Societe Generale Securities Services (SGSS) in New York. The intent is to integrate services such as equity and foreign-exchange trading, and clearance and custody, providing a more efficient and cost effective cross-border trading solution that provides efficient electronic access to markets worldwide.

"We will have direct access to market centers in Europe and Asia," Koller says, adding that the SGSS is targeting correspondents that already have significant cross-border business and are looking for a more cost effective and comprehensive solution.

SocGen won't be the first large financial firm to offer cross-border clearing and execution services. Bear Stearns and the Bank of New York's Pershing unit each provide access to numerous markets and securities-types overseas.