Momtchil Pojarliev
Traders Magazine Online News

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.

Traders Poll

Amid changes in builder, do you think the CAT project will be completed by 2020?

Free Site Registration

May 5, 2009

John Meserve, of BNY ConvergEx Group, discusses ...

By Editorial Staff

John Meserve, an executive managing director at BNY ConvergEx Group and chief executive officer of the firm's Westminster Research Associates unit, discusses the safety of account balances for commission-sharing arrangements.

On the safety of CSA balances

There is not much safety, other than thinking about where you do the business. The credit that comes out of that trade is just a future research receivable. It's not an asset of the money manager or an asset of the underlying client of the manager. It's just a future claim for research with that broker. That is the most important thing that gets lost in all these conversations. It's like frequent flyer miles: If you built up a lot of frequent flyer miles with Braniff or some airline and they no longer exist, those things don't transfer. They don't have cash value. You'd get nothing in a liquidation. It's really just a future airfare. It can actually translate into real airfares, and you can really get things with those credits. But for all intents and purposes, they are not transferable or convertible to cash or protected for the benefit of the account holder.

On use of those funds by brokers

What happened in some places ... All those commission dollars come in during the quarter and each day the treasurer has free rein to use those monies. So he's going to lever that up. In his prime brokering operation. In prop trading. In the derivatives area. Those research credits become part of the general operating fund of the broker-dealer who provided those commissions. In other words, there is no separate pot that sits there idly for the benefit of clients.

On the use of funds by Westminster and BNY ConvergEx

Westminster Research is a separate single-purpose vehicle whose whole raison d'etre is to provide administration and management of client commission arrangements. There are no other business arrangements that take place within Westminster. Those client credits are actually sitting there in dedicated accounts for the benefit of clients. [BNY earns the interest on those balances.] With ConvergEx, there is no prop trading. No prime brokerage. There is always a sufficient balance available for our clients. ConvergEx does have other business lines, but there is always a balance there for our clients.



On reducing risk by keeping balances low

I'm not recommending this, but the easiest way to manage CSA risk for a buyside firm is to keep balances at a manageable level. Don't have too much in your kitty at any one time. That's all right, but in times like these, when trading volumes are down, you have the issue of how you are going to pay for those research services. If you run out of money to pay for your traditional services plus alternative research ... even though you are not trading the idea, you still need to be able to get ideas. So you have to be careful not to get to the point where you are not able to acquire services.

(c) 2009 Traders Magazine and SourceMedia, Inc. All Rights Reserved.