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Goldman Sachs Discusses its Clearing Strategy
Battling through lower-volume expectations
Traders Magazine Online News, April 1, 2009
Clearing volume should be down some 15 to 20 percent this year, says Brian Duggan, chief executive officer of Goldman Sachs Execution and Clearing Services. That will pose challenges to clearing firms, especially institutional firms that depend on clients who record huge amounts of business,
he says.
The challenge is this: How can institutional clearers, whose businesses are built for scale, prosper when trading volume is expected to decline? Still, Duggan concedes that his counterparts on the retail side might have bigger problems, owing to dirt-cheap money that will hurt their spread business for Reg T accounts.
Some clearers won't be able to cope. Therefore, more consolidation is ahead for the clearing business this year, he predicts. In other words, it will be a rehash of what has been going in the clearing business for some time. He notes that over the years Goldman Sachs bought Spear, Leeds & Kellogg, as well as First Options of Chicago. These were firms that had themselves acquired dozens of broker-dealers.
Goldman Sachs has been going through its own identity change: In 2008 it transformed itself from an investment bank into a commercial bank. Goldman Sachs, both the bank and the clearing firm, has had to adapt to tough times, as have its some 500 correspondents. These institutional clients include hedge funds, market makers and institutional broker-dealers.
Yet even in these hard times, Duggan believes there are opportunities for institutional firms like his that specialize in listed business. The problems of the over-the-counter business could very well help his firm. Duggan recently discussed these issues with Gregory Bresiger for Clearing Quarterly and Directory (CQ&D).
CQ&D: What's the top priority for your correspondents in these uncertain times?
Duggan: The number one need for clients, besides having access to a global consolidated platform, is the ability to finance positions for them. Everyone is getting less inclined to extend credit and has become more balance sheet focused. Credit is becoming much more scrutinized.
CQ&D: Clearing is becoming a much tougher business because more banks have run into problems and there are fewer places to find financing for your clients?
Duggan: Very much so.
CQ&D: Institutional clearing firms, which could see dramatic drops in the business, have to do more to help correspondents find financing today? They're in a very different situation than clearing firms servicing the retail customer?
Duggan: Yes, that's a fair assessment. Most retail clients are carrying credit balances. What they're dealing with in the clearing space is the decline of interest income. That was the spread you would make on your credit interest. When interest rates are near zero, that's a real challenge for the retail clearing firms since they have a line item on their P&L that is now zero.
CQ&D: Is there a minimum number of correspondents needed to survive in this environment?
Duggan: It depends on your target market; retail or institutional.
CQ&D: So for you, on the institutional side, it's quality and not quantity of correspondents?
Duggan: Yes. Our 500 clients are in the market every day. We have a good business model for the size of our client list.
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