The definitive agreement struck last week by ConvergEx to purchase Cogent Consulting, a supplier of commission management solutions to institutional money managers and broker-dealers, will broaden the US-based agency broker’s offering, but the deal also reduces the field of independently-owned providers. As such, the transaction may leave some buy-side firms uncomfortable with sharing commission information with a sell-side counterpart.
Cogent’s services, which include CSA Trak, its online commissions payments platform, will now be offered to ConvergEx clients alongside Westminster, the broker’s existing commission services business.
“With this deal, we will be able to offer clients a full suite of services where they can see their broker votes and commission activities. And as a broker, we can provide a consolidated payment mechanism that gives the buy-side firm anonymity around how much they pay to third-party research providers. It gives clients one point of contact to administer and manage commissions,” John Meserve, executive managing director, ConvergEx, told theTRADEnews.com.
The use of commission sharing agreements (CSAs) – which allow buy-side firms to trade with brokers based on execution performance and keep a separate pot aside to pay research providers – came under the spotlight in Q4 last year after balances held at failed investment bank Lehman Brothers were frozen, leaving boutique providers unpaid.
As a result, buy-side firms were forced to reassess how they manage commission payments and mitigate counterparty risk, with some reducing the size of balances left at individual CSA brokers as well as the period for which funds were held. Most full-service broker-dealers and agency brokers offer proprietary commission management services, but independent providers are now harder to come by. Commission management software vendor Financial Sockets was acquired by State Street Global Markets in March 2008, while fellow provider 4TEUS, formerly known as Rontech, is currently working on a new offering due to be released next year.
ConvergEx prides itself on its unconflicted status and Meserve has insisted that Cogent will remain a separate entity from the rest of the broker following the expected completion of the deal at the end of the month, thereby retaining the data integrity and safeguards that clients would expect.
Furthermore, he notes that the failed attempt by a consortium of nine brokers to buy Cogent in May would have not eased the buy-side’s commission management and counterparty risk worries.
“My understanding was that they were going to have consolidated portal which the nine owner banks would use to manage their balances,” said Meserve. “Commission balances would have remained in the banks and payments would have been made between them, so it didn’t really address the balance safety issue that has been a major talking point post-Lehman.”
One factor behind ConvergEx’s decision to purchase Cogent was feedback from UK clients on the challenges of adhering to buy-side trade body the Investment Management Association’s disclosure regime which came into force at the beginning of 2006. This requires the de-aggregation of transactions by counterparties and disclosure of the amount of commissions generated on those transactions and the services received for commissions.
“Clients were beginning to ask us if we had the capabilities to send report cards to their brokers in conjunction with their CSA payments to keep up with regulatory requirements. From these conversations, we realised that we had to broaden our offering and provide a complete end-to-end third-party solution,” said Meserve.