Fidelity Looks to Expand Clearing Unit
May 15, 2006
Fidelity Investments' clearing services unit has expanded its client roster 129% since 2003, and the company expects to continue adding share as industry consolidation continues.
Norman R. Malo, president of Fidelity's National Financial unit, said it increased its market share from 7% at the end of 2003 to 12% at the end of 2005. Average daily trades grew 312% in this period, he said, and assets rose 146% to $570 billion. Within three years, the Boston company expects its market share will reach 15% to 17% through organic growth. Today, it manages $231.1 billion of clearing assets.
"Ten years ago, there were 153 clearing firms," Malo said. "Now that number is down by two-thirds, and there are only 50-something left, and that number will be cut in half in another couple of years."
Pricing pressure and the need for more scale and enhanced product offerings is driving many competitors out of the clearing business, Malo said, and forcing many companies that relied on self-clearing to outsource to companies like National Financial, Bear Stearns or Bank of New York's Pershing unit.
"You have to have a robust platform, complete with all the bells and whistles like UMAs," Malo said, referring to unified managed accounts. "You have to have the products, the integration and the platform. It takes strong offerings."
Matthew Schott, an analyst with the TowerGroup unit of MasterCard International in Needham, Mass., said that the share held by the top 10 clearing companies continues to grow rapidly. Higher regulatory and technology costs are making clearing more complex and more expensive, he noted.
"It is harder for smaller firms to make a go of it," Schott said. "It is harder to make a go of it with self-clearing. More firms that had been self-clearing are looking for a correspondent clearer, and correspondent clearers are combining as they are looking to increase scale."
Malo said the clearing business has evolved in the past 20 years from simply clearing and settling trades to offering a platform complete with market data, research, product offerings and an integrated workstation. To develop market share in the clearing business, a firm must have a strong platform and a financial commitment to keep up with changing regulatory demands and rising technological costs, he added.
National Financial, which has been a unit of Fidelity Brokerage since 1982 but was opened as a stand-alone company in April 2003, is developing new clients and scale quickly because of its product platform, Malo said. In fact, last year, it was the largest new-asset gatherer at Fidelity, adding $106 billion.
Malo said he is focused on organic growth right now. A major self-clearing company transferred to National Financial last year, he said, and his company is in the midst of contract negotiations with one more and in talks with six others.
Though he believes there will be more consolidation deals in the next three years, Malo does not think National Financial will need to make a major deal in order to stand out.
In 2003, a week after Fidelity spun off the unit, National Financial announced it had bought UBS PaineWebber's correspondent clearing services division, Correspondent Services Corp. National Financial added 149 clients in 2003, 100 of them from Correspondent Services. In December 2004, Fiserv sold its securities clearing division, BHC Investments, to National Financial for $365 million.
These two deals brought a number of banking clients to National Financial, including Fifth Third Bancorp, Citizens Financial Group, Bank of America, Washington Mutual and Northern Trust. Today, National Financial has a 61% share of the bank clearing market, though banks make up only 7% of its business, Malo said.
These two key acquisitions "told the industry that we were serious about the clearing business," Malo said. "We were serious about spending money and investing in our platform when a lot of firms were holding the line and not investing. That is what acquisition did for us."
Going forward, he continued, "We want to appeal to wirehouses, independent brokers and full-service broker/dealers. We want to provide a strong offering. We have 65,000 brokers on our platform, and that is pretty big, but we want to be able to continue to transform as the industry transforms around us. The dynamics are always changing."
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