How Do Correspondent Clearing Brokers Benefit From Real-time Risk Management?

Clearing brokers pair buyers and sellers, act as the trade clearing and settling principal, ensure the delivery of securities and report trade data. Some larger clearing brokers offer services that allow other firms to trade through one brokerage account and move the position for settlement in their own account. As such, correspondent clearing brokers have a responsibility and business interest to limit market risk across their various capacities.

But how can correspondent clearers adequately address risk when markets and volatility swing second to second and their customers are trading across multiple exchanges via myriad OMS/EMS platforms? The only real answer is a real-time risk management solution that gives them pan-market visibility and tools they need to make quick, informed decisions.

Where do correspondent clearers encounter risk?

Self-clearing is a capital-intensive and complex operation for many smaller introducing and executing brokers. Correspondent clearing services enable them to execute and clear trades through a larger broker to optimize costs and leverage infrastructure. Correspondent clearing brokers are thus at the crux of the post-trade cycle and must manage the associated risks accordingly.

For example, when introducing brokers bring their stock-trading business to a correspondent clearing broker, the clearing broker assumes the legal risk associated with the transaction, and therefore is exposed to default risk in the clearance and settlement chain. If the trade fails, the clearing broker must pay the remaining party out of its own capital to minimize the spread of risk throughout the market.

A correspondent clearing broker’s position can be particularly precarious in volatile market conditions. In a cash account, a clearing firm’s risk occurs between the time the trade clears and settles. But many institutional clients trade on a margin account and a sudden correction could put clearing firms on the hook if margin calls are not satisfied.

Clearing brokers are also exposed to risk when they facilitate securities lending transactions between the borrowing and lending parties. Traders that short sell a stock must borrow that stock in the market. If the clearing broker cannot process the transaction internally because it does not have the stock in its inventory, the stock must be located elsewhere, which may be difficult depending on the demand. Not being able to borrow the stock would result in a default.

The value of real-time risk insights

Given this varied risk exposure, correspondent clearing brokers need visibility across venues, trades, assets and accounts to take informed, immediate action on intraday risk. However, many rely on a patchwork of platforms that can’t match a singular, real-time view. Having immediate visibility will become even more critical when the industry moves from T+2 to T+1 settlement in 2024.

An ideal solution not only offers visibility, but functionality. Stress testing, heat mapping and custom automated alerts can all help organizations improve and streamline their intraday risk management.

A real-time risk management solution allows correspondent clearing brokers to improve capital efficiency, reduce the total cost of ownership and focus on driving revenue. Most importantly, it supports the strength and integrity of the financial markets.

However, operating and maintaining such a system can increase costs, strain resources and add to existing tech stack complexity. But a managed service can deliver venue and data provider connectivity to users without requiring them to directly manage a new implementation.

As a cloud-based SaaS solution, Nasdaq Risk Platform can provide correspondent clearing brokers the visibility and tooling they need in a way that also supports overall infrastructure modernization. The deployment model allows correspondent clearers to focus on their business, rather than technology. Real-time insights enable informed decision-making, and correspondent clearers can gain access to new technologies, scalability and flexibility to help them manage risk, address challenges and seize opportunity.

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Malcolm Warne

Nasdaq

Malcolm Warne is Head of Product for the Nasdaq Risk Platform. 

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