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Does size matter? The clearing house conundrum for int'l firms

Does size matter? The clearing house conundrum for int'l firms

Clearing houses’ push to streamline their coverage is making life difficult for independent financial advisors. Michelle Abrego looks into what options are available to them and what the future holds for the industry.

Declaring your independence is no doubt an increasingly coveted badge of honor among international financial advisors, but like many good things it doesn’t come easy.

There are obvious challenges to consider when going independent: leaving the comfort of a big brand name, becoming your own marketer, convincing clients to follow you and so on.

But international advisors, especially those catering to Latin American clients, also have a considerable technical hurdle to overcome: finding a group to clear their trading and investments.

Historically, there are three names that have dominated the clearing house industry: Pershing, Raymond James and Fidelity.

More recently, however, there has been a trend among large clearing houses to trim back the business they generate in Latin America.

Out of options?

In some cases they have gone as far as to cut back their regional coverage. This poses a considerable challenge for those advisors wishing to go independent, as new minimum account limits and specific country restrictions limit their options for finding a clearing house willing to take their business.

It’s fair to say that the industry is focused where the largest pools of assets are.

Unlike its competitors, Pershing’s John Ward said they have not adopted such a restrictive approach.

‘It’s still very much case-by-case [at Pershing], but it’s fair to say that the industry in general is focused where the greatest opportunity is, and that would be where the largest pools of assets are,’ said Ward, the firm’s senior relationship manager for global client relationships.

‘We don’t have a list of countries [we exclude]. There are some jurisdictions where we’re certainly not proactively looking for any growth, but we look at all opportunities individually and make a determination based on that individual profile and the opportunities associated with that.’

Everyone is looking to accept money from the largest markets, he added, especially Mexico, Brazil and Argentina as well as Chile, Colombia and Peru.

‘Then it tails off significantly. The smaller markets is where you get into the risk-based approach,’ said Ward. 

Among other concerns driving some firms’ decision is the cost of efficient anti-money laundering (AML) programs and that of opening and monitoring new accounts. In May 2016, Raymond James was fined $17 million by the Financial Industry Regulatory Authority for failures found within its AML programs dating back to 2014.

Fidelity and Raymond James declined to comment, but it is understood both have scaled back on signing on new business by limiting the countries from which they are willing to hold assets.

This review is not just not limited to the clearing houses; the offshore world has also reviewed its approach. The most notable examples have been the withdrawal of firms such as RBC Wealth Management and Credit Suisse. Others such as Merrill Lynch, HSBC Private Bank and Morgan Stanley have reduced their coverage by introducing a number of restrictions on new and current accounts.

We kind of felt like joining the Pershings of the world is almost like going to work for a Merrill Lynch or JP Morgan again.

While many groups are actively avoiding certain jurisdictions in Latin America, Ward said Pershing continues to see the region as an ‘engine of growth’ for its international business.

‘We do continue to see really positive asset flows and at the same time some of that is resulting from a shift to independents both through the broker-dealer and the RIA advisory channel,’ he said.

Independent view

When Luis Mariño went on the hunt for a clearing firm to back the launch of a US outpost for Swiss bank Union Capital Group in 2016, he decided to forgo the usual suspects.

‘The reason we didn’t go with what would be the obvious candidates, Raymond James or Pershing, was because we felt they were at the other end of the cycle, where they have grown over many years [and a business like ours] is probably more of a risk for them than an opportunity,’ said Mariño, who previously worked for Merrill Lynch’s international business for 20 years.

‘We kind of felt like joining the Pershings of the world is almost like going to work for a Merrill Lynch or JP Morgan again.’

Luckily for him, in July 2017 commodity trading giant INTL FCStone acquired clearing firm Sterne Agee and had leveraged its own global footprint to create an international clearing house catering to foreign clients.

‘[INTL’s] comfort level in the international marketplace was a key determinant which superseded the fact they were new to the clearing business,’ said Mariño.

‘Knowing they’re comfortable with the risk associated with having international clients was really important for me, and right off the bat you could pretty much write-off other firms.’

Another appealing factor, he said, is INTL FCStone gives him access to its senior decision makers in compliance and risk management departments.

‘We don’t have to talk to [someone] five levels down to get our decisions made. So what would be an impossible exception elsewhere we would get an answer very quickly with INTL.’

Becoming the alternative INTL FCStone is making its own niche, picking up firms that the larger clearing houses are turning away.

‘We’re leveraging that and we think that we can do it in a way that makes sense for us as a middle market player,’ said Roger Shaffer, managing director of INTL’s clearing firm.

‘We’re not as big as a Pershing but we can look at the same relationship and we’ll do the same work for it, like AML and monitor for US requirements, but we can look at that account and be profitable.’

The flexibility of its business model is also a key component, he said, as it can make smaller accounts more profitable and limit its structural and overhead costs.

INTL FCStone has customers in more than 130 countries with offices in Argentina, Brazil, Colombia, Mexico, Paraguay and is ‘very comfortable’ with Latin America.

Shaffer said every new relationship is considered on a case-by-case basis and the only excluded countries are those required by law, such as Cuba, North Korea, Syria and Iran.

Are they really marketable to a client in Latin America?

Other clearing firms are also quietly picking up assets in the offshore market. Omaha, Nebraska-based COR Clearing, led by former executives from Pershing, Bear Stearns Clearing and Sterne Agee, services more than 14,000 foreign accounts from institutional clients,
broker-dealers and RIAs.

Apex Clearing, which has a fintech focus, is also understood to offer clearing services for international firms. Charles Schwab is in the mix too, although focusing only on clearing for advisory-based accounts.

A director from an independent broker-dealer, who wished to remain anonymous, said it’s not the lack of smaller clearing players that is the problem.

‘The challenge is not so much that there aren’t players you can link up with – they are there – but is that really marketable to a client in Latin America? They want name recognition and they’re already
cautious [of the move].’

Jurisdiction jam

The current legal framework can also be tricky for some independent advisors. One Miami-based group with client assets of close to $400 million struggled to find a partner because a number of their clients were based in Venezuela. US sanctions on Venezuela are currently
limited to specific government debt issuances and the worsening political situation puts its future in question.

Fidelity and Pershing declined to take them on, and they felt the independent broker-dealers they spoke to did not offer competitive conditions. However, they eventually found a viable option.

‘We were surprised to find Charles Schwab has access for international clients. We decided to go with it, it’s a large institution, it’s competitive and they were ready to take the business,’ said one of the firm’s advisors.

While the advisor understood why they had been turned away, they said it seemed unfortunate and, to a degree, arbitrary.

‘The cost of the risk to take on that business is not well compensated, I guess. They don’t want to take the risk of doing that. Still, we know our clients. We know the source of their funds, their activities and we do our own abundant due diligence in terms of being sure where our assets are coming from.’

However, the lack of potential options in the clearing business for international clients has been a plus for independent broker-dealers.

Firms that initially try for an RIA option end up joining firms such as Bolton, Bulltick or Insigneo, said the independent broker-dealer director.

‘If you’re international and you don’t have a $1 billion business or you don’t fit in a country that custodians feel comfortable, then it’s going to be harder to be accepted.’

This article was originally published in the February 2018 edition of Citywire Americas.

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