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March 1, 2013

Wishing for Higher Rates

Clearers' Fortunes May Hang On Actions Of The Central Bank

By Gregory Bresiger

Please give us a break and "tighten" is what many clearing industry executives are saying.It is the quiet plea to the nation's central bank, the Federal Reserve, from many clearing executives. These executives are living through the unintended consequences of easy monetary policies, policies designed to revive the economy. However, the low interest rates over the past five years, clearing brokerage executives privately complain, have created an unintended victim: their brokerages.

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Executives privately say that dirt-cheap money and interest rates near zero are hurting both the brokerages and their clients.

Earning nothing in brokerage accounts is "bad for the client and it's bad for the brokerage," said Bill Yancey, a longtime clearing executive who now works with First Southwest Company in Dallas. Clients grumble, sometimes taking accounts elsewhere, and firms see what was once a healthy revenue stream disappearing, industry observers say.

Bill yancey,FirstSouthwest

Cheap money has made the clearing brokerages' money market/sweep accounts useless products and, in the process, damaged relationships between clients and brokerages.

"It affects the entire brokerage industry, particularly retail firms, because of the importance of cash to the economic model," explained Stephen Langlois, chief administrative officer for Fidelity Investments' National Financial. He added that the problem is "a macroeconomic issue and that no one can hide from it."

A former clearing brokerage executive agrees.

"It's very difficult to make money with these kinds of rates and these kinds of spreads," said Robert Mumby, who runs his own consulting firm, RM Associates, in Baltimore.

Yancey, First Southwest's managing director for clearing and execution services, will say publicly what many of his industry colleagues won't: He hopes this year the Federal Reserve will begin to slowly reverse its policy.

If the Federal Reserve merely raised interest rates by 50 basis points this year, "it would be a good beginning that could help the industry tremendously," Yancey said.

See Sidebar: Cheap Money

Why are the actions of the central bank so important?

Clearing brokerages, especially those without a captive client base, once earned significant revenues from interest-rate-sensitive services. This money, for some firms, has represented about a third of their revenues, industry observers say.

"Clearing firms generate revenues in several ways, including transaction charges, activity charges, margin interest and revenues based on activity levels," according to a report by the Aite Group, "Best Practices for U.S. Broker/Dealers: Evaluating Fully Disclosed U.S. Clearing Firms."