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At the time industry observers noted that the buy side was slowing down when it came to engaging new CCAs, and alternative models began to emerge. One model in particular was that of a consortium of bulge-bracket broker-dealers that quietly formed to focus on standardizing CCAs while reassuring the buy side that its commission dollars would be safe from counterparty risk.
The members of the consortium are under a nondisclosure agreement and are not allowed to speak to the press, but they communicate with their buy-side counterparts regularly on their progress. Still, no official word has come out of the consortium.
According to one relationship manager at a large investment management firm, the consortium has been in active discussions since October but has yet to release any definitive direction. "There is a lot of intrigue about what they are going to do and what standardization might look like," says the relationship manager, who spoke on the condition of anonymity.
Through industry contacts, he says, he has heard that the consortium is leaning toward delivering a unified front end for CCA standardization via an outside vendor well known in the CCA administration arena. He sees the consortium advocating for convergence onto a single platform to aggregate balances and provide administration for CCAs.
The relationship manager explains that the consortium is still hammering out a legal structure surrounding client balances but that the money will still sit with the eight to 10 broker-dealers involved with the consortium. So far there is no indication of how the consortium would guarantee the buy side's balances.
This buy sider, though, says the sell side might be missing the mark with its proposed CCA solution. "The problem is that they're trying to come up with a solution that meets all of the requirements of the sell side rather than a client-centric solution, and we end up with a compromise no one is happy with," he says.
"The consortium says everyone involved is getting along great, and we're going to be happy with the outcome. But they've been saying this for four months now and they still can't talk about it," the relationship manager adds.
His firm in particular is not waiting for the consortium's solution. Instead, it is looking to a custodian-type of firm to handle its CCA administration and balances.
For larger firms such as his, the standardized consortium platform may not fly. "Even if the sell side agrees on a consortium model, we say, 'We need to be comfortable,' and given the amount of dollars on the line, others will be in a similar position," he says, adding that the consortium platform would need to be able to service the various CCA models used by the buy side.
He adds that the consortium platform would be attractive to small to medium-size firms, but that other providers are already offering solutions that are just as attractive. "Any consortium model is a step behind at this point -- they're not even on the starting line and others are halfway down the track," he says, noting that other large players have been providing CCA administration for years.
Another kink in the consortium model may be that the broker-dealers are figuring out a revenue model for the platform offering. "I believe they are trying to figure out how to get paid for it -- who is going to put the money up and who is going to fund it, and then 'How are we going to charge the buy side for this?' " the relationship manager says.
He adds that this might be where the buy side sours on the consortium model. "This whole process needs to be a utility as opposed to a product," he contends. "[The broker-dealers] need to understand that they may never make money on this."
