Prime Brokerage is the generic name for a bundled package of services offered by investment banks and securities firms to hedge funds and other professional investors. There are two basic financial market participant categories Investor vs See Investor AB for the Swedish investment company An investor is any party that makes an Investment. A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment In Finance, private equity is an Asset class consisting of equity Securities in operating companies that are not Publicly traded on Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies Speculation, in a financial context is making an investment that increases the overall risk in a portfolio Institutional investors are organizations which pool large sums of money and invest those sums in companies A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money A building society is a financial institution owned by its members, that offers banking and other Financial services, especially mortgage lending A trust company is a Corporation, especially a Commercial bank, organized to perform the Fiduciary functions of trusts and agencies A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than those feasible for most individual investors A credit union is a Cooperative Financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift providing credit Insurance, in Law and Economics, is a form of Risk management primarily used to hedge against the Risk of a contingent loss Investment banks profit from companies and governments by raising money through issuing and selling Securities in the Capital markets (both equity and A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a Pension plan for the exclusive purpose of financing pension A trust company is a Corporation, especially a Commercial bank, organized to perform the Fiduciary functions of trusts and agencies The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds There are two basic financial market participant categories Investor vs Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions Personal finance is the application of the principles of Finance to the monetary decisions of an individual or family unit Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Financial regulations are a form of Regulation or supervision which subjects Financial institutions to certain requirements restrictions and guidelines aiming to Investment banks profit from companies and governments by raising money through issuing and selling Securities in the Capital markets (both equity and A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment The business advantage to a hedge fund of using a Prime Broker is that the Prime Broker provides a centralized securities clearing facility for the hedge fund, and the hedge fund's collateral requirements are netted across all deals handled by the Prime Broker. The Prime Broker benefits by earning fees ("spreads") on financing the client's long and short cash and security positions, and by charging, in some cases, fees for clearing and/or other services.
The following core services are typically bundled into the Prime Brokerage package:
- global custody (including clearing, custody, and asset servicing)
- Securities lending
- Financing (to facilitate leverage of client assets)
- Customized Technology (provide hedge fund managers with portfolio reporting needed to effectively manage money)
- Operational Support (prime brokers act as a hedge fund's primary operations contact with all other broker dealers)
In addition, certain prime brokers provide additional "value-added" services, which may include some or all of the following:
- Capital Introduction - A process whereby the prime broker attempts to introduce its hedge fund clients to qualified hedge fund investors who have an interest in exploring new opportunities to make hedge fund investments. In Finance, a custodian bank, or simply custodian, refers to a Financial institution responsible for safeguarding a firm's or individual's financial assets In Finance, securities lending or stock lending refers to the lending of securities by one party to another The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated
- Office Space Leasing and Servicing - Certain prime brokers lease commercial real estate, and then sublease blocks of space to hedge fund tenants. See also Leasing, Renting A lease is a Legal document, but can be an oral arrangement which confers a right on one person (called Real estate is a legal term (in some jurisdictions notably in the USA, United Kingdom These prime brokers typically provide a suite of on-site services for clients who utilize their space.
- Risk Management Advisory Services - The provision of risk analytic technology, sometimes supplemented by consulting by senior risk professionals.
- Consulting Services - A range of consulting / advisory services, typically provided to "start-up" hedge funds, and focused on issues associated with regulatory establishment requirements in the jurisdiction where the hedge fund manager will be resident, as well as in the jurisdiction(s) where the fund itself will be domiciled.
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History
The basic services offered by a prime broker give a money manager the ability to trade with multiple brokerage houses while maintaining, in a centralized master account at their prime broker, all of the hedge fund’s cash and securities. Additionally, the prime broker offers stock loan services, portfolio reporting, consolidated cash management and other services. Fundamentally, the advent of the prime broker freed the money manager from the more time consuming and expensive aspects of running a fund. These services worked because they also allowed the money manager to maintain relationships with multiple brokerage houses for IPO allocations, research, best execution, conference access and other products.
The concept and term "prime brokerage" is generally attributed to the U. S. broker-dealer Furman Selz in the late 1970s. A broker-dealer is a company that trades securities for customers as well as for its own account In the pre-prime brokerage marketplace, portfolio management was a significant challenge; money managers had to keep track of all of their own trades, consolidate their positions and calculate their performance regardless of which brokerage firms executed those trades or maintained those positions. The concept was immediately seen to be successful, and was quickly copied by the dominant bulge bracket brokerage firms such as Morgan Stanley, Bear Stearns, Merrill Lynch, Lehman Brothers, and Goldman Sachs. Bulge bracket is a phrase associated with Finance, in particular the Investment banking industry Morgan Stanley ( is a global Financial services provider headquartered in New York City New York United States The Bear Stearns Companies Inc, based in New York City, was one of the largest global Investment banks and securities trading and brokerage Merrill Lynch & Co Inc () is a global financial services firm Lehman Brothers Holdings Inc ( (pronounced ˈliːmən was a global financial-services firm prior to its bankruptcy and sale in 2008 The Goldman Sachs Group Inc, or simply Goldman Sachs ( is a large global Bank holding company that engages in Investment banking securities At this nascent stage, hedge funds were much smaller than they are today and were mostly domestic (US) long-short equities funds. The first overseas prime brokerage business was created by Merrill Lynch International Bank in London in the late 1980s. London ( ˈlʌndən is the capital and largest urban area in the United Kingdom.
Through the 1980s and 1990s, prime brokerage was largely an equities-based product, although various prime brokers did supplement their core equities capabilities with basic bond clearing and custody. Software for Fixed assets management and Stock control developed in 2004. In addition, prime brokers supplemented their operational function by providing portfolio reporting; initially by messenger, then by fax and today over the web. Over the years, prime brokers have expanded their product and service offerings to include some or all of the full range of fixed income and derivative products, as well as foreign exchange and futures products.
As hedge funds have proliferated globally through the 1990s and the current decade, prime brokerage has become an increasingly competitive field and an important contributor to the overall profitability of the investment banking business. As of 2006, the most successful investment banks each report over two billion dollars in annual revenue directly attributed to their prime brokerage operations (source: 2006 annual reports of Morgan Stanley and Goldman Sachs). The United States dollar ( sign: $; code: USD) is the unit of Currency of the United States; it has also been
Fees
Prime brokers do not charge a fee for the bundled package of services they provide to hedge funds. Rather, revenues are typically derived from three sources: spreads on financing (including stock loan), trading commissions and fees for the settlement of transactions done away from the prime broker. The financing and lending spreads, which are charged in basis points on the value of client loans (debit balances), client deposits (credit balances), client short sales (short balances), and synthetic financing products such as swaps and CFDs (Contract for difference), make up the vast majority of prime brokerage revenue. A contract for difference (or CFD) is a contract between two parties typically described as "buyer" and "seller" stipulating that the seller will pay to Therefore, clients who undertake substantial short-selling or leverage represent more lucrative opportunity than clients who do relatively less short selling and/or utilize minimal leverage. Clients whose market activities are principally fixed income oriented will generally produce less prime brokerage revenue, but may still present significant economic opportunity in the repo, foreign exchange (fx), futures, and flow business areas of the investment bank. Fixed income refers to any type of Investment that yields a regular (or fixed return Better known as Repurchase agreements ( RPs or repos) a Sale and Repurchase Agreement has a Borrower (seller/cash receiver sell securities
Risks
Prime Brokers facilitate hedge fund leverage, primarily through loans secured by the long positions of their clients. In this regard, the Prime Broker is exposed to the risk of loss in the event that the value of collateral held as security declines below the loan value, and the client is unable to repay the deficit. In practice, such conditions arise only in the case of extraordinary volatility or unexpected correlation reversions and are exceedingly rare. Other forms of risk inherent in Prime Brokerage include operational risk and reputational risk.
Large prime brokerage firms today typically monitor the risk within client portfolios by either Value-at-Risk ("VAR") or "Rules Based" stress testing. Stress testing entails running a series of what-if scenarios that identify the potential gains or losses for each position due to adverse market events.
Examples of stress test scenarios include:
- Flight to Quality
- 1% up or down parallel movement in 10 year treasury yield curve
List of Prime Brokers
The following firms are known to be providing prime brokerage services at present:
- ABN AMRO
- Banco Espirito Santo
- Bank of America
- Barclays Capital
- (Bear Stearns, previously one of the dominant prime brokers, was merged into JPMorgan Chase in March, 2008)
- BNP Paribas
- Calyon Financial
- Citigroup
- CIBC World Markets
- Credit Suisse
- Deutsche Bank
- Dresdner Kleinwort
- Fidelity Investments
- Fortis
- Goldman Sachs
- Interactive Brokers
- Jefferies & Company
- JPMorgan Chase
- Lehman Brothers
- Merrill Lynch
- Morgan Stanley
- Nordea
- NewEdge Group (ex Fimat & Calyon Financial)
- RBS
- RBC Capital Markets
- Rabobank
- Scotia Capital
- SEB
- Triad Securities
- UBS
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