The Best Way to Invest With Multiple Brokers

Transcription

1 The Best Way to Invest With Multiple Brokers Presented by: Tracy Marcus Managing Director Fixed Income Sales November 2017 Ramirez & Co., Inc. 61 Broadway, 29th Floor New York, NY (800)

2 Objective Roundtable discussion featuring Debbie Laudermilk of Travis County as well as input from the investment managers at the State of Texas as well as from other state and locals about the ways they achieve optimum results investing their cash portfolios with multiple brokers. We will explore the role of primary, and regional dealers and discover ways to best manage broker/dealer options Government Treasurers Organization of Texas Page 2

3 Brokers / Primary Dealers / Regionals / MWBE According to FINRA, there are 635,073 registered reps as of October There are 3,756 member firms and 159,247 branch offices. Every brokerage firm and broker who does business with the US public must be licensed and registered by FINRA. At year-end 2016, there were 24 firms expelled. There were 26 firms suspended. There were 517 individuals barred. There were 727 individuals suspended. Page 3

4 Primary Dealers Primary dealers are obligated to participate in the auction of debt issued by the US. Government, to create markets in this debt and to transact with foreign buyers. The primary dealer desks are also obligated to provide insight as to market developments and support the implementation of monetary policy. They take periodic surveys and submit weekly activity reports. In order to apply to be a primary dealer you have to be a broker dealer; an approved member of FINRA, net capital of at least 50mm OR a state or federally chartered bank or savings association that is subject to bank supervision and maintains at least 1 billion in Tier 1 capital. You must be able to demonstrate a substantial presence as a market maker that provides two- way liquidity in US government securities, primarily treasury cash and repo. You must have significant back office operation to be able to confirm and settle transactions. There are other requirements as well concerning providing margin, clearing stipulations and disaster recovery capabilities (all of which can be found on newyorkfed.org). Primary dealers need to continue to meet their expectations on an ongoing basis. There are 23 primary dealers. Primary Dealers Bank of Nova Scotia, New York Agency BMO Capital Markets Corp. BNP Paribas Securities Corp. Barclays Capital Inc. Cantor Fitzgerald & Co. Citigroup Global Markets Inc. Credit Suisse AG, New York Branch Daiwa Capital Markets America Inc. Deutsche Bank Securities Inc. Goldman Sachs & Co. LLC HSBC Securities (USA) Inc. Jefferies LLC Primary Dealers J.P. Morgan Securities LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated Nomura Securities International, Inc. Mizuho Securities USA LLC Morgan Stanley & Co. LLC RBC Capital Markets, LLC RBS Securities Inc. Societe Generale, New York Branch TD Securities (USA) LLC UBS Securities LLC. Wells Fargo Securities, LLC Page 4

5 Regional Dealers An August 2017 report published by Greenwich Associates, The Fixed Income Dealer Evolution, shows that 96% of US investment grade bond investors trade with regional fixed-income dealers. As the nation dealt with the financial crisis in 2008, many of the larger banks were dealing with cutbacks and rebranding. As a result many investors took a look at the regional players and the number of brokers at regional dealers steadily climbed. If you look at surveys taken regarding satisfaction with regional brokers, the numbers are high. Technology has allowed for an even playing field and transparency. The regional firms have been able to acquire top talent over the years as larger firms have downsized. Individuals also find more opportunity to provide more service and expertise to their clients working at a regional firm. The brokers at these firms may have a specialty niche, analyze spread relationships, provide swap opportunities and overall provide comprehensive coverage that the larger firms may not feel they need to do or can do. Many accounts feel the need to approve only primary dealers which may limit the kind of coverage they receive and the benefits of more individualized service and relationships. Most all state and local accounts take delivery of their securities purchased and would avoid any liquidity/insolvency issues that could arise. The portfolios would not be jeopardized. Page 5

6 MWBE Dealers MWBE /Minority, Women and Veteran Owned dealers are regional dealers that have dated back to the 1970 s. The city of Atlanta s mayor back in the 70 s encouraged the city to do more municipal bond business with these firms and the trend today has become far reaching. Many state and locals have mandates and sometimes it s encouraged behavior. These firms are skilled. They have niches that distinguish them from their peers and are just as focused on technology and execution as their bulge bracket counterparts. Page 6

7 Approval Processes Most all state and locals have an approval process. Some have a more formal process than others and it really varies from one entity to the next. Here is an example of a cities policy with basic rules for approval and due diligence: I. Approved Dealer List A. the Treasurer shall recommend and maintain a list of dealers approved by the Investment Oversight Committee, with whom the City may conduct investment business. 1. The Investment Oversight Committee shall approve the list of dealers at once a year. 2. Changes can be made at any time during the year based on recommendations by the Treasurer. **This addition is important in the event you have a relationship that should change firms or if a firm calls that you feel would be a valuable addition. II. Requirements for Approved Dealers A. A dealer must provide/submit the following to be considered. 1. An interview via phone or in person, followed up by a letter of introduction, resume and request to do business. 2. Completed City Broker/Dealer Information form, which includes a certification that the dealer has read the City Investment Policy and shall abide by its terms and conditions, and will provide suitable investment advice. 3. Copies of the firm's latest financial statements or SEC form 10-K. Continued disclosure is required to stay on the approved dealer list; annual or quarterly reports or SEC form 10-Q. 4. Proper registration. All firms shall be registered with the National Association of Securities Dealers (NASD). Treasury staff performs a registration/background check with the State on the firm and the individual; insuring firms are registered and individuals are registered/licensed to do business in State Name. III. Due Diligence 1. Instruments regularly offered by the firm, 2. Individual experience with permitted City investment securities, 3. Market-making/underwriting capabilities (selling group membership), 4. Research capabilities of the firm, 5. General reputation of the firm and the individual, 6. Registration requirements of the firm and the individual, Page 7

8 Feedback / Communication The best coverage is given to accounts that provide the most feedback and transparency! Communication between broker and investor ranges from none to communicating every day about cash flow, investment needs, the market, swap opportunities. It s how relationships are built and allows the firms sales and trading desks to get to know what your cash flow and investment needs are. The best coverage goes to the accounts who share the most information even when the investor buys elsewhere! Brokers know that business gets spread around. Brokers, while they try to increase the share of business they earn, know that business gets done away. It s important to share as much as you can whether you are in the market or not. Most experienced brokers should be aware that the role of the treasurer, cash manager, investment manager requires many other duties than simply investing and be sensitive to that. At the same time, the investor should recognize that the job of the broker is to maximize the business they have, learn about your cash flow and portfolio and the only way to do this is by communicating. Page 8

9 What Does Your Broker Mix Look Like? Most state and locals have a blend of primary, bank and regional dealers. Regardless of the number of brokers approved, there seems to be a group that emerges as the entity s core group. If you practice transparency, then everyone will have an equal opportunity to be value added. You will be able to distinguish those who simply send runs, inventories and every new issue print, from those who listen, are idea driven and have the best interests of your entity in mind. Brokers sharing ideas allows you to stay on top of the market and what is being offered. Again this is where communication is critical. The more you share, the better ideas you should receive. They should be mindful that you have multiple responsibilities during the course of each day. One thing to note regarding broker mix is that firms who are only doing day paper would require primary coverage for treasury/repo/cp/cd markets. Accounts that are open to longer dated callables/bullets/and steps should think differently about that coverage. Page 9

10 Conclusion There are many ways to manage multiple brokers. Whether you are mandated to have a large list or simply choose to is one option. Many entities decide to shorten their approved lists. The reasons can be due to the amount of business they do. It can be because they simply do not have the time and resources to manage communication from a large number of people. Either way, the best way to manage your list is feedback and transparency. It does not have to be every day but timely responses will earn you superior coverage from the sales desk as well as the trading desk. There is virtually no broker who wants to be calling and ing and sending Bloomberg messages only to come up with radio silence. There is a difference between a broker doing their job for you and someone who has a little too much time on their hands. It is the job of the broker to be generating ideas to improve the quality of the investment portfolio. It is perfectly okay for an investment manager to let their broker know how they can improve and make your life easier. Page 10

11 Disclaimer 2017 Samuel A. Ramirez & Co., Inc. Member FINRA/MSRB/SIPC. This material contains the opinions of the author but not necessarily those of Samuel A. Ramirez & Co., Inc. and such opinions are subject to change without notice. The material provided herein has been prepared for informational purposes only without regard to any particular client s investment objectives, financial situation, or means, and Samuel A. Ramirez & Co., Inc. is not soliciting any action based upon it. This material is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation, or trading strategy would be illegal. Further, forecasts, estimates, and certain information contained herein are based upon both proprietary research and independent third party providers of data and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources considered reliable, but Samuel A. Ramirez & Co. Inc. has not verified this information and does not represent that this material is accurate, current, or complete and it should not be relied upon as such. Page 11