 |
| Finance series |
|---|
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 needing the ability to borrow securities and cash to be able to invest on a netted basis and achieve an absolute return. The prime broker provides a centralized securities clearing facility for the hedge fund so the hedge fund's collateral requirements are netted across all deals handled by the prime broker. These two features are advantageous to their clients.
The prime broker benefits by earning fees ("spreads") on financing the client's margined long and short cash and security positions, and by charging, in some cases, fees for clearing and/or other services. It also earns money by rehypothecating the margined portfolios of the hedge funds currently serviced and charging interest on those borrowing securities and other investments.
Each client in the market of a prime broker will have certain technological needs related to the management of its portfolio. These can be as simple as daily statements or as complicated as real-time portfolio reporting, and the client must work closely with the prime broker to ensure that its needs are met. Certain prime brokers offer more specialized services to certain clients.
For example, a prime broker may also be in the business of leasing office space to hedge funds, as well as including on-site services as part of the arrangement. Risk management and consulting services may be among these, especially if the hedge fund has just started operations.
The following services are typically bundled into the Prime Brokerage package:
In addition, certain prime brokers provide additional "value-added" services, which may include some or all of the following:
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. However, the first hedge fund operation is attributed to Alfred Winslow Jones in 1949. 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, Credit Suisse, Citigroup, and Goldman Sachs. At this nascent stage, hedge funds were much smaller than they are today and were mostly U.S. domestic long-short equities funds. The first non-U.S. prime brokerage business was created by Merrill Lynch's London office in the late 1980s. Post the 2007 - 09 financial crisis new entrants came to the market, such as HSBC with a custody-based prime brokerage offering.
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. 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).
As hedge funds have proliferated globally through the 1990s and the current decade - *this sentence is out of date, please update this document*
The financial crisis of 2007-09 brought substantial change to the marketplace for prime brokerage services, as numerous brokers and banks restructured, and customers, worried about their credit risk to their prime brokers, sought to diversify their counterparty exposure away from many of their historic sole or dual prime broker relationships.
Restructuring transactions in 2008 included the absorption of Bear Stearns into JP Morgan, the acquisition of the assets of Lehman Brothers in the US by Barclays, the acquisition of Merrill Lynch by Bank of America, and the acquisition of certain Lehman Brothers assets in Europe and Asia by Nomura. Counterparty diversification saw the largest flows of client assets out of Morgan Stanley and Goldman Sachs (the two firms who had historically had the largest share of the business, and therefore had the most exposure to the diversification process), and into firms which were perceived, at the time, to be the most creditworthy. The banks which captured these flows to the greatest degree were Credit Suisse, JP Morgan, and Deutsche Bank. During these market changes, HSBC launched a prime brokerage business in 2009 called "HSBC Prime Services", which built its prime brokerage platform out of its custody business
The prime brokerage landscape has dramatically changed since the collapse of Lehman brothers in September 2008. Hedge funds who received margin financing from Lehman Brothers could not withdraw their collateral when Lehman declared bankruptcy due to a lack of asset protection rules (such as 15c3 in the United States) in the United Kingdom. This was one of many factors that led to the massive deleveraging of capital markets during the Financial Crisis of 2008.
Upon Lehman's collapse, investors realized that no prime broker was too big to fail and spread their counterparty risk across several prime brokerages, especially those with strong capital reserves. This trend towards multi-prime brokerage is also not without its problems. From an operational standpoint, it is adding some complexity and hedge funds have to invest in technologies and extra resources to manage the different relationships. Also, from the investors' point of view, the multi-prime brokerage is adding some complexity to the due diligence as it becomes very complicated to perform proper assets reconciliation between the fund's administrator and its counterparties.
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.
Therefore, clients who undertake substantial short selling or leverage represent more lucrative opportunity than clients who do 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.
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. 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 through house-designed "risk based" margin methodologies that consider the worst case loss of a portfolio based on liquidity, concentration, ownership, macroeconomic, investing strategies, and other risks of the portfolio. These risk scenarios usually involve a defined set of stress test scenarios, rules allowing risk offsets between the theoretical profit and losses (P&Ls) of these stress test scenarios for products of a common underlier, and offsets between groups of theoretical P&Ls based on correlations.
Liquidity penalties may be established using a rule-of-thumb for days-to-liquidate that 10% of the daily trading volume can be liquidated without overdue influence on the price. Therefore, a position 1x the daily trading volume would be assumed to take 10 business days to liquidate.
Stress testing entails running a series of what-if scenarios that identify the theoretical profits or losses for each position due to adverse market events.
Examples of stress test scenarios include:
|
||||||||||||||||||||||||||||||||||||
HOT DESIGNS ▪ Premium designs ▪ Designs by country ▪ Designs by U.S. state ▪ Most popular designs ▪ Newest, last added designs ▪ Unique designs ▪ Cheap, budget designs ▪ Design super sale DESIGNS BY THEME ▪ Accounting, audit designs ▪ Adult, sex designs ▪ African designs ▪ American, U.S. designs ▪ Animals, birds, pets designs ▪ Agricultural, farming designs ▪ Architecture, building designs ▪ Army, navy, military designs ▪ Audio & video designs ▪ Automobiles, car designs ▪ Books, e-book designs ▪ Beauty salon, SPA designs ▪ Black, dark designs ▪ Business, corporate designs ▪ Charity, donation designs ▪ Cinema, movie, film designs ▪ Computer, hardware designs ▪ Celebrity, star fan designs ▪ Children, family designs ▪ Christmas, New Year's designs ▪ Green, St. Patrick designs ▪ Dating, matchmaking designs ▪ Design studio, creative designs ▪ Educational, student designs ▪ Electronics designs ▪ Entertainment, fun designs ▪ Fashion, wear designs ▪ Finance, financial designs ▪ Fishing & hunting designs ▪ Flowers, floral shop designs ▪ Food, nutrition designs ▪ Football, soccer designs ▪ Gambling, casino designs ▪ Games, gaming designs ▪ Gifts, gift designs ▪ Halloween, carnival designs ▪ Hotel, resort designs ▪ Industry, industrial designs ▪ Insurance, insurer designs ▪ Interior, furniture designs ▪ International designs ▪ Internet technology designs ▪ Jewelry, jewellery designs ▪ Job & employment designs ▪ Landscaping, garden designs ▪ Law, juridical, legal designs ▪ Love, romantic designs ▪ Marketing designs ▪ Media, radio, TV designs ▪ Medicine, health care designs ▪ Mortgage, loan designs ▪ Music, musical designs ▪ Night club, dancing designs ▪ Photography, photo designs ▪ Personal, individual designs ▪ Politics, political designs ▪ Real estate, realty designs ▪ Religious, church designs ▪ Restaurant, cafe designs ▪ Retirement, pension designs ▪ Science, scientific designs ▪ Sea, ocean, river designs ▪ Security, protection designs ▪ Social, cultural designs ▪ Spirit, meditational designs ▪ Software designs ▪ Sports, sporting designs ▪ Telecommunication designs ▪ Travel, vacation designs ▪ Transport, logistic designs ▪ Web hosting designs ▪ Wedding, marriage designs ▪ White, light designs E-COMMERCE DESIGNS ▪ Magento store designs ▪ OpenCart store designs ▪ PrestaShop store designs ▪ CRE Loaded store designs ▪ Jigoshop store designs ▪ VirtueMart store designs ▪ osCommerce store designs ▪ Zen Cart store designs CMS DESIGNS ▪ Flash CMS designs ▪ Joomla CMS designs ▪ Mambo CMS designs ▪ Drupal CMS designs ▪ WordPress blog designs ▪ Forum designs ▪ phpBB forum designs ▪ PHP-Nuke portal designs ANIMATED WEBSITE DESIGNS ▪ Flash CMS designs ▪ Silverlight animated designs ▪ Silverlight intro designs ▪ Flash animated designs ▪ Flash intro designs ▪ XML Flash designs ▪ Flash 8 animated designs ▪ Dynamic Flash designs ▪ Flash animated photo albums ▪ Dynamic Swish designs ▪ Swish animated designs ▪ jQuery animated designs WEBSITE DESIGNS ▪ WebMatrix Razor designs ▪ HTML 5 designs ▪ Web 2.0 designs ▪ 3-color variation designs ▪ 3D, three-dimensional designs ▪ Artwork, illustrated designs ▪ Clean, simple designs ▪ CSS based website designs ▪ Full design packages ▪ Full ready websites ▪ Portal designs ▪ Stretched, full screen designs ▪ Universal, neutral designs CORPORATE ID DESIGNS ▪ Corporate identity sets ▪ Logo layouts, logo designs ▪ Logotype sets, logo packs ▪ PowerPoint, PTT designs ▪ Facebook themes VIDEO, SOUND & MUSIC ▪ Video e-cards ▪ After Effects video intros ▪ Special video effects ▪ Music tracks, music loops ▪ Stock music bank GRAPHICS & CLIPART ▪ Pro clipart & illustrations, $19/year ▪ 5,000+ icons by subscription ▪ Icons, pictograms |
| Super Offers |
| Super Offers |
| Custom Logo Design $149 ▪ Web Programming ▪ ID Card Printing ▪ Best Web Hosting ▪ eCommerce Software ▪ Add Your Link |
| © 1996-2013 MAGIA Internet Studio ▪ About ▪ Portfolio ▪ Photo on Demand ▪ Hosting ▪ Advertise ▪ Sitemap ▪ Privacy ▪ Maria Online
|
