With money managers’ commission sharing balances frozen at Lehman Brothers’ European unit, the industry is rethinking the critical payment mechanism.
“This is an absolute wake-up call for folks in terms of who they have their CSAs with,” Ray Tierney, global director of equity trading at Morgan Stanley Investment Management, said at a conference this week. “I think there will be a push towards a consortium with some type of insurance wrapper.”
Lehman Brothers International, the European division of Lehman Brothers Holdings, is under the administration of accountants PricewaterhouseCoopers, as per U.K. bankruptcy law. Any balances in LBI’s commission sharing arrangement accounts are frozen and the account holders are being treated as unsecured creditors. It is uncertain how long this will remain the case although Nomura Holdings did agree to buy some of LBI’s equities’ assets.
Because of the problems in London, U.S. trading executives on both the buyside and the sellside are exploring ways to safeguard credit balances of client commission arrangements (CCAs), the U.S. equivalent of the CSA. These are the monies held by brokers for eventual payment to the money managers’ research providers.
Client commission arrangements account for approximately $2 billion of the total $12 billion commission pool, according to estimates by Greenwich Associates.
One old idea being dusted off is that of a consortium. Rather than maintain CCA accounts at several different brokers, money managers would maintain an account at one entity that would deal with all the brokers.
The idea has been around for a while, but has never taken hold. Proponents say it makes it easier for the buyside to manage multiple CCA balances. Opponents say it results in a loss of control that could lead to information leakage.
In any case, putting one together would likely be difficult. “Trying to get a consortium together is like trying to herd cats,” Mike Plunkett, president of Instinet, says. “I wouldn’t expect that to happen tomorrow.” The broker already operates a consortium type arrangement called T*Shares that aggregates multiple CCA balances.
Another idea is to somehow segregate the CCA account from the broker-dealer, but within the bank that owns the broker-dealer. “We are looking into the legal/regulatory viability of whether a separate and distinct bank account for CCA balances can be created to protect those balances,” Mark Conforti, Credit Suisse’s global head of client commission arrangements, says. “That would take that account out of the [broker-dealer] entity. Does that accomplish anything? Does it protect the client money? That is, of course, a legal question. But we are asking.”
UBS, which already functions as a sort of consortium in the U.K., pooling its own CSA balances with those of its competitors, is also examining the issue.
“At the very least there will be some contracts written that protect your money if your commissions are sitting in another broker,” Bob Harrington, UBS’s head of cash equity trading, said at this week’s Traders Magazine conference. “There have been discussions internally as to how we are going to approach it.”
He added: “People want to be clear that if you are the holding bucket for the commissions, those are your dollars, not the entity’s dollars. So we will have to figure out how to structure that legally. And we will learn what will happen to Lehman International.”
MSIM has already taken steps to protect some of its balances. Tierney told attendees at the Traders Magazine conference: “We have already been able to establish insurance around a firm we had some concerns with. We moved some balances around internally to protect ourselves should another event occur.”
That money managers’ CCA balances could be at risk is not an idea that has generated much discussion in the past. With the Lehman bankruptcy, that has changed.
“This is all virgin territory, but we have to look into it,” Credit Suisse’s Conforti says. “Ultimately the most important thing is protecting client money.”
