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April 15, 2009

Safeguarding Commission Dollars

By Peter Chapman

"When we first started to look [at CSAs], the average was about two to four brokers," DeSalvo said. "The funny part was, you only wanted to go to the big bulge bracket players because that's where funds would be safest. That's not so much the case anymore. We are diversifying among those guys, as well as some of the mid-tier brokers. We all anticipated that many of the mid-tier brokers would be hurt by CSAs. In fact, it has been the opposite."

GSAM is also keeping its CSA balances lower than before by sweeping them out quarterly.

Centralized Bank

Despite the perception of safety that comes with diversification, the trend of using more trading desks goes against the rationale for CSAs, others point out. CSAs allow the buyside to reduce the number of its trading partners and achieve some economic efficiencies.

"Traders want fewer trading partners," Frank Porcelli, Bloomberg Tradebook's head of commission management services, told the TradeTech crowd. "Now all of a sudden, if you expand the number of CSA brokers, you are back to where you started."

Both Porcelli and Howard noted that not all money managers are diversifying. The very large global managers are still seeking to reduce the number of their CSA brokers. "For ease of administration, they want to collapse that all into one centralized bank," Porcelli said.

Still, DeSalvo warned against putting the eggs into too few baskets. "If you had asked people two years ago where Lehman fit in," he said, "they would say Lehman was in that select few of CSA brokers. I would caution people that you just don't know these days. It's a very different environment."

Money managers Cohen & Steers Capital Management jumped on the diversification bandwagon in the fourth quarter of last year. "Our worry was that not only would our CSAs have problems," said Anthony Dotro, Cohen & Steers' global head of trading, "but that our typical trading partners were having problems. Trading with Lehman, for example, ended up being wasted dollars."

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