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Surviving Counterparty Risk and Crashing Rates
A Q&A with Penson's Daniel Son
Traders Magazine Online News, June 12, 2009
These days, clearing is a dicey business. Problems include lean margins, firms falling by the wayside, counterparty risk, falling Federal Funds rates that hurt lending lines and big correspondents changing firms owing to numerous changes on Wall Street, among others.
Yet little of this persistent pessimism came through in a recent question-and-answer session with Penson Worldwide's president and co-founder, Daniel Son. His firm, Son says, continues to expand in difficult times. It is already very strong in Canada (where he claims it is the largest fully disclosed clearing broker-dealer), is a player in Europe and is expanding into new parts of Asia. (It just established a presence in Australia.)
It continues to sign new clients. And Son notes that Penson is now the number three clearing firm in correspondents. Indeed, Penson's correspondent base has increased in the last five years, from 163 to 300.
Why?
Son makes the case that clearing firms with "non-conflicted models" have an inherent advantage. By that, Son is referring to clearing firms that are primarily retail and aren't competing with many of the clients they serve. Those kinds of firms, he argues, will prosper even in tough times if they do a few things well.
Yet it's not all good news for Penson. It is cleaning up after a mess in Canada with client Evergreen in which no Penson official or system was at fault (see Briefs). And Penson, sensitive to the risk management issues worrying so many in the clearing and settlement field, is actually jettisoning some business. (This story originally appeared in the summer issue of Clearing Quarterly & Directory.)
CQ&D: What's the climate for clearing firms today? Can one survive in a bear market and when volumes are down?
Son: It's a good time for us. It's a stressful time in the market, but we believe our model has been validated. We do execution and clearing, and we don't compete with our customers.
Daniel Son
CQ&D: So you have been able to expand even in difficult times?
Son: Yes, we have 24 new correspondents that have signed with us and are in the pipeline and should be generating revenue for us in the next few months.
CQ&D: However, you are also turning away some business.
Son: Yes, in the first quarter we added 17 new correspondents, and in the same quarter we terminated 19, which brought us to 300 correspondents.
CQ&D: Why get rid of business?
Son: Those leaving were generally the result of our credit and risk review, which we are going to carry out on our entire correspondent base. And that termination rate is a bit higher than normal.
CQ&D: So you're being more particular with new business and even with clients you've had for years?
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