Bear acquisition may upset clearing ‘balance of power’

With JPMorgan Chase & Co. likely to stay in the clearing business after it completes its acquisition of The Bear Stearns Cos. Inc., the giant bank “could throw a new dynamic into the competitive landscape” in the clearing and custody business, according to a new report.

The potential shakeup comes at a time when “the traditional correspondent-clearing market is stagnant,” according to Aite Group LLC of Boston, which issued its report last month to four leading clearing firms: Pershing LLC of Jersey City, N.J., National Financial Services LLC of Boston, Ridge Clearing and Outsourcing Solutions Inc. in Lake Success, N.Y., and Bear Stearns Securities Corp. of New York.

Aite requested that 10 firms respond to the survey, but only those four companies participated, answering 265 questions.

“The pending sale of Bear Stearns to JPMorgan could upset the balance of power either through selling the unit or deciding to combine it with JPMorgan offerings,” the report stated.

Another potential development in the clearing business is for the parent of Ridge Clearing to buy another clearing firm, according to the report, “The Evolution of Correspondent Clearing: Major Players Are Finding Their Niche.”

Last year, Broadridge Financial Solutions Inc. of Lake Success was spun off by Automatic Data Processing Inc. of Roseland, N.J., and that move is significant, the report concluded. Broadridge then changed the name of its clearing unit to Ridge Clearing.

“Given that Broadridge has been unfettered from Automatic Data Processing and has control over their own mergers-and-acquisitions destiny, Aite Group expects they will have their hand in a portion of industry consolidation,” the report stated.

SHRINKING UNIVERSE

Consolidation has had a profound effect on the clearing business. There were about 130 firms that performed custody and clearing functions for broker-dealers 10 years ago, and there are now about 25 (InvestmentNews, April 7).

Broadridge “is highly likely to make an acquisition,” the report’s author, Adam Honore, senior analyst with Aite, said in an interview.

For Ridge Clearing “to sustain growth, an acquisition makes sense. Also, ADP stifled them for years,” Mr. Honore said.

“The most important aspect of the report is how clearing firms are segmenting their businesses,” he said.

For example, Mr. Honore noted that Pershing last year launched iNautix, an independent-consulting firm designed to capture more of the information technology spending of clients. He also noted that National Financial last month said that it wants to push into the market for self-clearing firms and to offer those broker-dealers an array of clearing services.

Meanwhile, Ridge Clearing has built a “solid” wealth management platform in order to capture more of the market for registered investment advisers, Mr. Honore said.

The future direction of the Bear Stearns clearing business has a lot of potential consequences, the report stated.

First, New York-based JPMorgan Chase “currently clears through National Financial. It would be unlikely that arrangement would continue in this scenario,” the report noted. National Financial is a unit of Fidelity Investments, also of Boston.

“We value relationships with all our clients, including JPMorgan,” said Adam Banker, a spokesman for National Financial.

“Second, JPMorgan Chase brings retail presence to Bear Stearns in product offerings, which could open new segments in the combined company,” the report stated.

“Third, Bear Stearns’ clients are already a target for competitors with the uncertainty around the deal,” the report stated. “Bear Stearns may find themselves trying to recapture market share they lost during the corporate transition.”

Bear Stearns’ clearing group’s management team, including co-heads Joe Triarsi and John Tyers, are slated to move over to JPMorgan Chase, said a company official, who asked not to be identified. Shareholders vote on whether to approve the deal at the end of the month.

But Bear Stearns’ clearing clients have adopted a wait-and-see attitude regarding the deal, said Dennis Gallant, president of Gallant Distribution Consulting of Sherborn, Mass.There is a lot of speculation about clients’ looking to leave, but he doesn’t know if they will actually do so, he said.

Broker-dealers tend not to make “rash decisions” when it comes to choosing another clearing firm, because the transition can be “onerous,” Mr. Gallant said. Plus, many broker-dealers clear through and use the custody services of two different firms.

“It’s a way for firms not to have their eggs in one basket,” Mr. Gallant said.

E-mail Bruce Kelly at [email protected].