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June 1, 2012

Risky Business for Some Clearers?

By Editorial Staff

When capital ratios of correspondents are slipping, the clearing broker needs to move fast to protect itself, a new study from LaRoche Research Partners says.

Doug Dannemiller

The study, which examined the expenses and the risk profiles of 10 big clearing brokerages, said clearing firms should "improve their agreements with correspondents by incorporating capital reserve related triggers in clearing agreements going forward." It also found that almost all the biggest firms have some potentially risky business.

Doug Dannemiller, one of the authors of the report, said clearing firms should "constantly monitor the agreement, because the high-risk firms were likely better capitalized when the agreement is struck." This change in capital, he says, represents a problem for the clearing brokerages.

"Namely, the problem is that the price of clearing services is not adequately flexible to deal with changing costs in the form of risk brought to the clearer by its correspondents," the report says.

The study, "U.S. Retail Clearing Expense and Clearing Firm Analysis 2012," found that scale is a key element in clearing cost savings. Mergers and acquisitions, the report said, will lead to improved profitability in the clearing industry. Of the top 10 clearing firms, Pershing and National Financial are the most cost efficient, Dannemiller said.

The report also warned that smaller firms, if "they are to compete in the highly competitive retail financial services marketplace, should place additional emphasis on securing competitive pricing for clearing services."

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