I wrote a story about the buy-side expanding the CCAs from U.S. equities to execute in international equities and across multiple asset classes. The story is getting some traction. Integrity Research summarized the story in its blog, “CCAs for Fixed Income.”

Integrity noted: “The details of these non-equity CSAs are somewhat unclear at this point, as it is difficult to cross-compare commission arrangements in fixed income and other asset classes with equities — one suspects that the implementation of said CSAs may well require the assistance of specialized CSA management system providers like Cogent.”

Actually the brokers are offering their own Internet-portals for tracking CCAs and CSAs. I’m sure they can help the buy-side document the different fee structures for equities, versus international equities and options. This gets tricky as the buy-side sets up multiple CSAs, they may not want one executing broker to know what they are paying the other CSA brokers.

But when I reported on this story, I had a difficult time finding buy-side traders who would talk to me. Those who had CCAs didn’t want to speak. Brokers like CAPIS, Instinet, Investment Technology Group, are offering CCAs in options, while CAPIS is offering both options and fixed income. But none of these firms could divulge a client that was willing to talk about this emerging trend.

This is a young trend so perhaps not that many buy-side institutions are practicing it yet. I came across one large asset manager who is deploying the CCAs in international equities but for internal reasons declined to be interviewed. Then I found a large global asset manager who said his firm wants nothing to do with CCAs because they are like soft dollars. I also think buy-side firms are reluctant to discuss commission arrangements with brokers for fear of information leakage.

However, CCAs are different than traditional soft dollars in that they allow the institution to execute through one firm and pay another firm for the research. This frees up the buy-side to execute through brokers that they feel offer best execution and allows them to pay the best research providers with a check.

It was interesting to read that institutional investors are continuing to set up client commission arrangements (CCAs) with their equity brokers. More than 45 percent of institutions employ these commission management arrangements, also commonly known as commission sharing agreements (CSAs in the U.K.) and that is up from about 25 percent of institutions that reported using CSAs last year, reported Greenwich Researchin its 2008 U.S. Equity Research study released last week.

Everyone assumes that bulge bracket firms will dominate the executing broker relationship as more buy-side transition to CCAs. But so far, the consolidation of trading relationships via CSAs has not been too painful for the smaller and regional brokers, according to Greenwich. Even though Merrill Lynch and Lehman Brothers were named as the top two executing brokers in U.S. equities, firms like Instinet, BNY ConvergEx and ITG are competitive in terms of quality and are able to compete against the biggest brokers.

However, brokers who find themselves relegated to receiving a check for research, as opposed to keeping the trading relationship with the buy-side, will find this to be less profitable, according to Greenwich. My buy-side sources told me they valued their relationships with smaller broker dealers that specialize in industry-specific research and knew where the liquidity was in small cap names and still arranged crosses with those firms.

On a different note, I noticed that Bill George of Blue Sky Research in Encino, Calif., a frequent commentator on regulatory matters pertaining to institutional commissions and soft dollars, admonished me (and Integrity Research) for using the terms CCA and CSA interchangeably in the article.

“The regulations, concepts and processes in these two structures are very different, and as far as I know, from a regulatory perspective, the term Client Commission Arrangement has no meaning in any jurisdiction except the U.S.,” wrote George in an email that was widely distributed. I am aware that the CSA rules are different from the CCA rules but it’s hard to stop the industry from confusing the two terms, which mean the same thing in spirit.

Not to sound defensive, but in the article, I did state that CSAs originated in the United Kingdom where they replaced the use of soft dollars as a result of the Financial Services Authority's (FSA) implementation of Rule CP176 in 2005. I quoted a U.K. buy-side trader, Mike Groves of New Star Asset Management on the benefits of CSAs for achieving best execution. I recall that brokers are not permitted to share commissions in the United States and that is why the SEC crafted different rules.

To confuse matters even more, what if asset managers that operate globally decide to expand CCAs into international stocks? Does that mean they’ll have CCAs for U.S. equities and CSAs for foreign stocks? Now I’m confused! However, one of my sources (Robin Hodgkins, CEO and president of Cogent) told me that buy-side firms use both terms interchangeably and he predicts that the term CCA will disappear within a year. Perhaps that would simplify things, if the SEC agrees to adopting the FSA's term.

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