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Clearing the Way to Omnibus Broker-Dealer Registration

by InnReg

Smaller broker-dealers are facing intense market pressures at the moment. Fees are declining, and the big players are getting bigger. Digital broker-dealers might wonder whether they made the right move when choosing a fully-disclosed model instead of an omnibus model. Despite conventional wisdom, it is possible to convert to an omnibus model. Compliance experts can help you navigate the process. And the result? New revenue streams, and new ways to offer value.

Digital broker-dealers are starting to face significant market pressures to revisit their business model. Large incumbent platforms, already featuring a wide range of investment options from equities to ETFs to alternative assets, have joined more recent entrants in offering commission-free trading. As a result, they have disrupted the industry by raising the bar for smaller digital broker-dealers to compete for new investors and retain existing ones. 

A Tough Climate for Small Broker-Dealers

These aggressive moves by legacy players may well drive smaller players out of business or foster market consolidation, because they make it very difficult to compete on price. For digital broker-dealers now, the pressure is on, unless they can find new revenue streams, new pockets of investors, and new ways to offer differentiated value.

One challenge to overcome is the realities of the digital broker-dealer business model. Many went into operation on a fully-disclosed basis, relying on clearing firms to take on a large portion of the technology requirements, compliance and reporting duties, and financial responsibilities. 

The Fully-Disclosed Model

The fully-disclosed model undoubtedly allows for a faster and cheaper path to market, and for lower compliance and operational burdens. However, it creates dependencies in how orders are placed, how transactions are cleared and settled, how statements and reports are generated, how compliance is managed, etc. The fully-disclosed accounts model also narrows down options to a very small set of clearing firms that can handle the business requirements of large-volume digital brokers activity.

Rising Interest in the Omnibus Model, But Concerns Remain

An increasing number of digital broker-dealers are coming to InnReg recognizing they need to break through these constraints to stay ahead of the changing market. For some, converting from fully-disclosed and registering as an omnibus broker-dealer instead can open up significant advantages. 

Some in the industry shy away from even considering converting to an omnibus model, or registering as an omnibus broker-dealer in the first place, because of its reputation as a challenging process to implement. The fear is that it may push broker-dealers into unknown territory with recordkeeping and compliance. 

Omnibus Advantages

However, in our experience as a full-service compliance provider, it is quite feasible to help digital broker-dealers unlock the advantages of an omnibus structure, including:

  1. Greater latitude in finding new revenue streams beyond commissions and fees. Omnibus accounts make it easier to derive revenue from sources such as interest on uninvested cash, premium services including margin lending, and order flow payments.
  2. The ability to substantially reduce costs by building out internal recordkeeping capabilities rather than depending on the few clearing firms that can offer them. With a wide range of clearing options to compare, the omnibus basis allows broker-dealers to negotiate a better deal, lowering what is usually the largest part of their operating costs
  3. More flexible options for B2B deals. For example, this flexibility helps a broker-dealer tap into lucrative cross-border investors by making arrangements directly with international broker-dealers and thereby more easily accessing their investors instead of on a one-by-one basis

Breaking Through the Misconceptions

Because of the complexity of registering on an omnibus basis, tapping into these advantages may seem intimidating; there are many misconceptions and exaggerated anxieties about omnibus conversion in the industry. A practiced hand can guide you through with a more balanced and objective way to think about these concerns about converting to an omnibus structure.


Technical Barriers

No doubt, building out new technologies can be a challenge, and the omnibus model does require new technology. In today's world of Software-as-a-Service and APIs, however, you should not assume that you have to build your own technology stack end-to-end by yourself.

The right consulting partner can walk you through the process of partner selection and technology integration. Your IT capabilities are not confined to the four walls of your own company with a service-based IT approach. 


Regulatory Risk

Increased regulatory scrutiny does raise the bar in terms of the amount of customer and transaction-level data that broker-dealers must collect. While subaccounting in the omnibus model does raise its own recordkeeping challenges, ultimately these are no more or less complex than fully-disclosed accounts if you (re)design compliance workflows and implement them accordingly.


The Self-Clearing Myth

The omnibus model is sometimes conflated with the notion of migrating fully to self-clearing. The two are not mutually dependent. As mentioned above, the omnibus model allows you to work with more clearing firms because you take on more of the load with middle- and back-office functions.

However, if your business were to grow to the scale that self-clearing becomes a financially viable option, a previous migration to the omnibus model ultimately will make that easier.


Front Office Focus

A well-designed compliance program mitigates the risk of needing to divert resources from user acquisition and product development. In addition, the world of finance is continuing to evolve into a model where firms can create bundles of services, including outsourcing compliance and non-core back-office processes.

If you engage a reliable outsourced compliance provider with a fully functioning back-office operations facility and the latest APIs and cloud-based solutions, all integrated with your user acquisition and client service workflows, there is no loss of focus on excellence in front-office capabilities.

Can Omnibus Be Your Life-Line?

For many digital broker-dealers, rethinking the business model will shift quickly from a future consideration to an existential business model decision. If you see the writing on the wall and are struggling to react to a world where no-fee, no-commission trading is the norm, converting to an omnibus structure may offer you a life-line. Let's have a conversation about which model makes the most sense for your business.

Topics: Broker-Dealer Compliance

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