Custodians, prime brokers and correspondent clearers in securities and derivatives face diverging medium-term prospects, according to a report by Mercer Securities, a division of MMC Securities Corp., a U.S.-registered broker/dealer, and Lazard Frères & Co. LLC. The report, ‘Securities Servicing: Profiting from Outsourcing and Operational Risk’, says that prime brokerage and correspondent clearing businesses is likely to deliver relatively strong growth, but core custody is facing weakening volume growth and further fee compression. Custodian earnings are projected to grow at 9 per cent over the next year, significantly below the 30 per cent growth seen over the last 12 months. The report suggests that in 2004 custodians should account for revenues of approximately $18bn, prime brokers are likely to capture approximately $4bn excluding execution, securities clearers are also likely to capture $4bn, and the derivatives clearers – a different group of players – should capture $4bn in revenues. Mercer Securities expects custody earnings growth of approximately 6%pa in the medium term, as new inflows slow and margins on hidden fees fall.
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