Newedge to split clearing and execution

December 13, 2012 07:25 AM

Futures broker Newedge announced plans today to transform its business model and split its futures commission merchant (FCM) into two separate legal entities: One focusing on execution and the other on clearing services.

Newedge CEO Nicolas Breteau, leader of the third largest FCM as measured by U.S. customer segregated funds, says the firm’s plan is the result of a recently completed large scale review of its business.

The plan includes streamlining business operations and possibly reducing staff and some of its global offices has been submitted to shareholders at Credit Agricole and Société Générale, who Breteau says are very supportive of the plan. Next the plan must be presented to the French Works Council. The firm’s execution of the plan can happen only after the opinion from the Works Counsel, according to Breteau who expects it to happen by the first quarter of 2013.

“The supermarket approach to brokerage is not appropriate to the new environment,” Breteau says. “We have to be more selective, we have to be more focused and we want to continue to invest in what we do best, our core business: Listed futures execution.”

Newedge will look at activity based on profitability, risk/reward and prospects for growth according to Breteau. “This is really about efficiencies; it is about restoring some of the profitability that has been attacked by the environment of the last five years.”

Part of the plan will involve reviewing its offices in 20 countries. “It is a global project. In each location we are going to look at what we want to do. Do we want to have an office specialized in execution or an office specialized in clearing? Or do we want to have two offices? That is our approach country by country,” Breteau says.

The regulatory environment in Europe is one reason for the split. “This execution company will not provide clearing services, but [it] will continue to reference clients to Newedge,” Breteau says.  “The logic here is that I don’t believe going forward an execution entity can flourish if it is under the heavy burden of a banking license environment. We believe it will be much more attractive for clients if execution is ring-fenced from [clearing].”

Breteau says the entire transformation will take up to 18 months, targeting mid-2014 for its completion.

“These businesses will flourish and be better suited in different separate legal entities. Two companies owned by the same shareholders where the execution will be driven by less regulation,” Breteau says, adding, “We want to keep these two companies close because we want to maintain the synergy that we have built over the years.”

The Newedge brand will remain as a clearing firm. The new execution arm of Newedge will likely have a separate name but it has not been announced.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.