Understanding Prime Brokerage Services
The success of a hedge fund depends on its access to a wide range of markets and products such as commodities, currencies, equities and fixed-income securities. But it needs a conduit to touch base on these arenas—this is where prime brokerage comes in.
According to AIMA, the primary role of prime brokers is to enable hedge fund managers to trade with multiple brokers and consolidate their cash balances and securities in one master account or a clearing facility. This account serves as reference for settlement and custody and consolidated reporting.
Aside from execution and custody services, Forbes explained that prime brokerage also provide hedge funds the ability to borrow stocks or bonds, also known as securities lending, or borrow money to buy stocks and bonds instead or margin financing.
Japanese financial holding company Nomura explained that these offers initially developed as a way of minimizing costs resulting from failed deliveries, but today, these practices are dramatically growing as important components of the domestic and international securities markets.
“The steady growth of securities lending is a result of its pivotal role; improving efficiency, enhancing the liquidity of securities markets and supporting sophisticated trading and arbitrage strategies,” Nomura adds.
The demand for prime brokerage only came into picture during the 1970s. Before, hedge funds’ custody requirements were just accomplished by traditional custodians, while broker-dealers handle margin accounts. However, as requirements increased and competition continues to heat up, specialized services have become a necessity.
Alongside the continuous expansion of prime brokerage services, regulators, clients and investors are now demanding for more robust internal controls. Some of which, according to KPMG, include curbing short selling, improving transparency and enhancing custody control requirements.
Also, because much emphasis is now given on the safety of client assets, prime brokerage firms now receive great pressure from external auditors to reevaluate and restructure the control environment that governs their system platforms and operations.
The challenges don’t stop there as KPMG adds that the rising intricacy of investment management products and services is also “driving the need for enhanced operational control to facilitate effective information flow and on-demand reporting between funds and their servicers.”
While many asset management companies promise to offer the best prime brokerage services, it is better to look for an institution that is partnered with a trusted global clearing firm and custodian, and that can also provide a platform that is multi-asset class. Find a firm that can assist you all throughout the stage—from start-up services to financing, to securities lending and trade clearance and custody, to timely and accurate client reporting.
According to AIMA, the primary role of prime brokers is to enable hedge fund managers to trade with multiple brokers and consolidate their cash balances and securities in one master account or a clearing facility. This account serves as reference for settlement and custody and consolidated reporting.
Aside from execution and custody services, Forbes explained that prime brokerage also provide hedge funds the ability to borrow stocks or bonds, also known as securities lending, or borrow money to buy stocks and bonds instead or margin financing.
Japanese financial holding company Nomura explained that these offers initially developed as a way of minimizing costs resulting from failed deliveries, but today, these practices are dramatically growing as important components of the domestic and international securities markets.
“The steady growth of securities lending is a result of its pivotal role; improving efficiency, enhancing the liquidity of securities markets and supporting sophisticated trading and arbitrage strategies,” Nomura adds.
The demand for prime brokerage only came into picture during the 1970s. Before, hedge funds’ custody requirements were just accomplished by traditional custodians, while broker-dealers handle margin accounts. However, as requirements increased and competition continues to heat up, specialized services have become a necessity.
Alongside the continuous expansion of prime brokerage services, regulators, clients and investors are now demanding for more robust internal controls. Some of which, according to KPMG, include curbing short selling, improving transparency and enhancing custody control requirements.
Also, because much emphasis is now given on the safety of client assets, prime brokerage firms now receive great pressure from external auditors to reevaluate and restructure the control environment that governs their system platforms and operations.
The challenges don’t stop there as KPMG adds that the rising intricacy of investment management products and services is also “driving the need for enhanced operational control to facilitate effective information flow and on-demand reporting between funds and their servicers.”
While many asset management companies promise to offer the best prime brokerage services, it is better to look for an institution that is partnered with a trusted global clearing firm and custodian, and that can also provide a platform that is multi-asset class. Find a firm that can assist you all throughout the stage—from start-up services to financing, to securities lending and trade clearance and custody, to timely and accurate client reporting.
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