How to Choose a Clearing Firm for a Broker-Dealer

For an introducing broker-dealer, the clearing firm is the most important vendor it will ever choose. The clearing firm holds customer accounts, settles trades, sends statements and confirmations, and supplies most of the reports the firm uses to supervise its business. The choice also affects the firm’s net capital, its costs and what products it can offer. This guide explains where to find a list of clearing firms and how to compare them.

Where to Find a List of Clearing Firms

There is no single official list of clearing firms for introducing broker-dealers, but several free regulator and industry sources together give a reliable picture. Our securities industry directory links to each of them:

• DTCC participant directories list the firms that are members of DTC, NSCC and FICC, which is where self-clearing and carrying firms appear.
• Annual audited reports (Form X-17A-5) on SEC EDGAR for introducing firms similar to yours. The notes to the financial statements usually name the clearing firm and describe the clearing deposit.
• FINRA BrokerCheck for the clearing firm itself, to review its registration history and any disclosures.

Looking at the firms that clear for broker-dealers like yours, with similar products, customers and size, quickly narrows the list to a realistic shortlist.

Decide Which Clearing Model Fits Your Firm

Most small and mid-sized broker-dealers clear on a fully disclosed basis: customers have accounts at the clearing firm in their own names, and the clearing firm carries the accounts and sends statements. In an omnibus arrangement, the introducing firm holds one account at the clearing firm and keeps the individual customer records itself, which brings more books-and-records and financial responsibility. Self-clearing means the firm clears and carries accounts itself. That requires far more capital, staff and systems, and for an existing member it is a material change in business that needs FINRA’s approval first.

Compare the Terms That Drive Cost and Risk

• Clearing deposit and minimums. How large is the deposit, can it be reduced as the business grows, and are there monthly minimum fees?
• Net capital treatment. Ask whether the deposit and the firm’s proprietary assets held at the clearing firm will be covered by a PAIB agreement, so they count as allowable assets in the net capital computation.
• Pricing. Ticket charges, platform and technology fees, account fees passed to customers, and any revenue sharing on cash sweeps or margin.
• Products and services. Equities, options, fixed income, mutual funds and alternatives, margin and securities lending, retirement accounts and international clients.
• Technology and reports. Trading and account-opening tools, the exception and surveillance reports the firm will rely on for supervision, and how data feeds into your books and records.
• Exit terms. Contract length, notice periods, termination fees and how accounts would be transferred if you leave.
• Financial strength and service. Review the clearing firm’s own audited financial statements, and talk to introducing firms that use it about service and responsiveness.

Understand the Net Capital and Membership Effects

The clearing arrangement sets the firm’s minimum net capital under SEC Rule 15c3-1. An introducing firm that does not receive customer funds or securities generally has a $5,000 minimum, while one that receives them but promptly forwards them to the clearing firm generally has a $50,000 minimum. A firm that carries customer accounts starts at $250,000. Your FINOP should model the effect of any proposed arrangement before you sign, including how the clearing deposit and any reserve requirements will be treated.

Also check your FINRA membership agreement. If it describes your clearing arrangement or limits the business you may conduct, a change may need FINRA’s approval through a Rule 1017 continuing membership application before it takes effect.

Read the Clearing Agreement Carefully

FINRA Rule 4311 governs carrying agreements. The agreement must allocate responsibilities between the two firms, including account opening and approval, order receipt and execution, extension of credit, receipt and delivery of funds and securities, confirmations and statements, safeguarding of funds and securities, and books and records. FINRA must approve carrying agreements and material changes to them, and customers must be told in writing how responsibilities are divided. Your written supervisory procedures should match what the agreement says each firm will do.

Plan the Conversion Before You Sign

Moving to a new clearing firm usually takes several months. The project includes the bulk transfer of customer accounts, new account documents and customer notices, updates to WSPs and supervisory reports, new data feeds for the general ledger, and a closing reconciliation with the old clearing firm. Build the timeline around the notice period in your current agreement so the firm does not pay for two clearing relationships longer than necessary.

Clearing Firm Selection Checklist

1. Build a shortlist from DTCC directories and peer firms’ X-17A-5 reports.
2. Confirm each candidate supports your products, customers and expected volume.
3. Compare deposits, minimums, ticket charges and termination terms side by side.
4. Have your FINOP model net capital under each proposal, including PAIB treatment.
5. Check your membership agreement for any approval needed from FINRA.
6. Review the Rule 4311 agreement’s allocation of responsibilities against your WSPs.
7. Set a conversion timeline and customer communication plan before signing.

Related service: Outsourced FINOP services