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December 1, 2012

What Went Wrong?

By Gregory Bresiger

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CQ&D: How has this developed?

Mumby: There were cases going back to the 1990s that have forced clearing firms to be more involved in what they're processing, how they're processing and why they're processing. They have had to give tools to introducing firms, helping them to manage supervision and know their sales practices and on and on.


CQ&D: An example of that?

Mumby: It began with some of the complications Bear Stearns had with some of their clients back in the late '90s. The first wave of that were industry rules that required clearing firms to send a list of compliance reports to each introducing broker. And secondly, the requirement that any customer complaint that comes to a clearing firm regarding an introducing firm must be forwarded to the SRO.


CQ&D: But client attorneys have pointed to clearing firm officials that have closed eyes to the dishonest practices of clients, but went along and processed their business...

Mumby: Naturally, clearing firms have done some things wrong. But if the result of all this is the clearing firm has the ultimate responsibility for the introducing broker, then it will have a dampening effect on the individual investor.


CQ&D: And so?

Mumby: Their opportunities to go to a small or middle-size clearing broker will be impinged because the clearing firm's cost of business in risk and protection will be transferred to the introducing firms.


CQ&D: So it comes down to today, the industry is down to fewer than 20 clearers.

Mumby: Depending on how you classify it, it's actually somewhere between eight and 15.

CQ&D: How do you advise these clearing survivors to make money? It seems to be an impossible business.

Mumby: No, not really. With changes like these will come opportunities, and the industry adapts.


CQ&D: Challenges, but opportunities to make changes-that's what you have said about the clearing industry. Please explain.

Mumby: For instance, I believe traditional pricing of clearing and custodian services needs to be looked at. Charging on a transaction basis isn't going to cut it anymore.


CQ&D: Why?

Mumby: That doesn't accurately reflect the other costs and values and risks of providing valuable services.


CQ&D: Some trades are much more daunting than others?

Mumby: Right. And also there are other factors that must enter into pricing. They are fixed costs of being able to provide clearing: the firm's balance sheet, technology and subject matter expertise; the firm's breath of capabilities across assets and borders. These all must enter into pricing.


CQ&D: So some firms have not be able to properly adjust their pricing. And some, you have said, are not able to provide all the expanded services clients today demand?

Mumby: Yes, the breadth of demands beyond just being a processing platform.


CQ&D: Some examples of these expanded demands?

Mumby: Well, brokerages face demands for an Internet front end for both account access and for trades. With the demands on brokerages for online trading came the demand for clearing firms to support that.


CQ&D: And also...