Wachovia Enters Clearing, a Shrinking Field

Wachovia Corp.'s corporate and institutional trust division started an institutional clearing services unit Wednesday, but industry analysts questioned whether the Charlotte, N.C. banking company would be able to compete in a business where scale is required.

Wachovia said the new unit will handle non-fully disclosed securities clearing and financing for institutional companies. It already owns First Clearing Corp., which does fully disclosed clearing.

John Graham, the vice president of business development at Wachovia, said it bought a book of business from State Street Corp. to gain entry into the non-fully disclosed business. Consequently, the new institutional clearing business opens with 30 broker-dealer customers.

A broker-dealer has three options when choosing how to handle securities clearing. It can use a fully disclosed clearing company, to which it must give the names and addresses of customers. It can use an omnibus clearing company like the one Wachovia has just created to which this information need not be disclosed. Or it can do self-clearing.

Graham said Wachovia plans to target middle-market banks and broker-dealers. Only Bank of New York and JPMorgan Chase now offer similar clearing service, he said. "Those guys do tons of business," he said. "They are like machines. We want to be more service-oriented."

He believes there are many opportunities to expand, Graham said.

"We have gotten very positive feedback because there are a dwindling number of providers in this market," he said. "We are just launching now, and people are happy to hear there are some alternatives."

Analysts and executives said clearing, whether fully or non-fully disclosed, is a difficult business for a company to enter and build share in. TowerGroup, a Needham, Mass., research company, has said that the top 10 clearing companies manage 70% of the market and that their share is growing as smaller companies are steadily absorbed by larger players.

Norman Malo, the president of National Financial, the clearing unit of Fidelity Investments, said in an interview last week that consolidation is on the rise in the clearing business. (National Financial mainly does fully disclosed clearing.) Companies like Fiserv, whose clearing unit National Financial recently bought, are being pushed out because the business is not a core competency, he said.

"If you aren't a good portion of your firm's revenue, you won't be a part of your firm much longer," Malo said. "Over the next several years, I think more firms are going to go back to their main streams of success," he added.

A year-old survey by TowerGroup of clearing services companies' revenue ranked National Financial as the third-largest, with a 10% market share, behind Pershing BNY, a Bank of New York unit, at 15%, and Bear Stearns, at 11%. Matthew B. Bienfang, an analyst at TowerGroup, said many companies are carefully considering whether clearing is a business that is worth developing to a size that is profitable. "A lot of these firms are reevaluating that and looking at the risk," he said. "These firms are not squarely in the clearing space, and there is significant risk in this business."

Graham conceded that scale is needed to compete in clearing. By working side by side with Wachovia's custody business and First Clearing, he said, however, the new unit opens with "built-in scale."

"Look, I know you cannot be a small provider in the clearing business," he said. "You need a capital base and the infrastructure, and that is why this is a nice fit. We have all of this business behind us, and we were able to acquire a staff that has been in the clearing business for 15 to 20 years."

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