Q&A with BNP Paribas Prime Brokerage and Custody

For ambitious traders that can scale their strategies and seek to operate a hedge, a prime broker will be needed in time. Prime brokers facilitate the handling of large securities transactions and will provide the necessary tools to enhance your trading operations if your business is worthy enough for the prime broker. Short sale locates, access to dark pools and custodian vs prime broker clearing are all part of the core business of prime brokers.

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They look to a variety of sources, including prime broker services, to increase their capital. These services, which are mostly offered by financial institutions, are created to meet the needs of hedge funds. A prime broker is a central broker through whom https://www.xcritical.com/ the fund executes most or all of its trades and who typically acts as custodian of the fund’s assets.

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Its plan to develop a business underscores how the market in prime brokerage continues to evolve in new ways in the wake of the credit crisis. Prime Brokerage (PB) is a set of services financial organisations provide to hedge funds and other big investment clients, enabling them to borrow securities or cash to engage in netting to attain absolute returns. Nowadays, clients also prefer holding a crypto PB account because it provides advanced market data and tools.

What Does a Clearing Company Do?

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. A custodian can similarly transfer liability for the loss of a financial instrument held by a sub-custodian appointed by it to that sub-custodian. According to the Prime Brokerage survey, Goldman Sachs averaged 7.0 for foreign exchange PB in 2021. Speaking about my professional activities, I can say that I have always been attracted to the study of foreign languages, which later led me to the study of translation and linguistics.

Gold Trading with the Lowest Spread

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. Finally, the FSA published, as part of its October 2010 policy statement, a high-level review of the SPV structures established by some prime brokers to hold client money and assets and designed to be insolvency remote. It is notable that the FSA’s amended custody regime does not give any formal role to such SPV structures and it is likely that such structures will remain the exception for most investors due to the higher costs involved. Whether its direct access or conventional zero-commission app-based trading, a brokerage (registered broker-dealer) is required to execute trades. A prime brokerage goes beyond just execution but provides a suite of services that enable large institutions, traders, hedge funds to implement their trading strategies at a cost.

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“For actively traded portfolio securities, movements back and forth between a global custodian and a prime broker would have been expensive and have led to operational risk,” explains Davis. “Morgan Stanley used an existing national bank subsidiary to create a custody solution for unencumbered assets. Morgan Stanley’s custody product, which is separate from the broker dealer, provides clients’ assets with safety and soundness for their unencumbered assets. Indeed, solutions of exactly that kind have come under critical scrutiny by the practitioners of the new profession of operational due diligence. Capital introduction is essentially the process of connecting hedge fund managers to potential investors in the form of the prime broker’s asset management and private banking clients. The unanswered question is what the evolution of prime custody will do to the commercial economics of the prime brokerage business.

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But the German bank reckons fund managers and their investors are bound to be less comfortable with any solution that offers asset segregation within the same banking group. “If a client is concerned about the viability of a financial institution, they tell us they do not want to be in another part of that same financial group and would rather hold the assets externally” says Byrne. But internal segregation is precisely the alternative that well capitalised universal banks such as HSBC, J.P. Morgan and SEB now offer. In fact, in building its prime brokerage business HSBC has chosen to use its creditworthiness and custody capabilities as the twin foundations. Though its ambitions have provoked a sceptical response from market-leading prime brokers, its model is playing well with potential clients.

• In this case, hedge funds being asked to pay higher fees at their prime brokers will look around for better options.
• Complex legacy environments often consist of a patchwork of systems that integrate poorly and require extensive reconciliations, causing a business to be bloated and inefficient.
• Hedge fund assets are protected by PBs, which also allow the efficient transfer of funds following trades.
• You can monitor the details of your investment positions and transactions in one place using a consolidated view that facilitates record-keeping.
• Consider a prime brokerage like a primary care physician that provides most of your medical treatment.
• 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.

Whether these services are called Prime Custody or something else, the end result is a transfer of assets away from prime brokers and to custodians. The benefit to hedge funds is that a custodian will charge lower fees and typically a straight fee for assets under custody. For unencumbered long assets (including exchange-traded assets that have leverage baked in), this may be a less expensive solution than keeping all assets at a prime broker.

Prime brokers offer a comprehensive bundle of financial services, from order execution to account management and asset optimisation. On the other hand, execution brokers focus on finding matching orders and processing trades at tight spread ranges and low price divergence. Large investment banking firms, financial insurance agencies, and hedge funds typically demand these services, which they outsource to experienced personnel or third-party contractors. 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. These surface-level solutions can rarely hide the state of the underlying systems.

These new rules apply to all UK authorised investment firms that hold client money/assets, including overseas branches of those firms, and UK branches of non-EEA firms who are subject to the CASS Rules. With platforms like Arkis, any individual or entity can access leverage and other prime brokerage functions without the need for intermediaries or meeting high entry thresholds. A single source of truth platform has the potential to optimise operations across teams, asset classes, and geographies, reducing cost, complexity and risk. In turn, this makes it easier for emerging managers, professional traders, and institutions to access capital markets – without limitations on firm size, return profile, or strategy. In this unstable prime brokerage landscape, client service matters more than ever. Fund managers should focus on providers who offer high-touch white glove service and are prepared to grow with the fund.

Many of the earliest and largest ECNs have expanded and evolved into Alternative Trading Systems (ATS) that operate like… Nevertheless, Plus500 does not provide access to MetaTrader platforms and requires a relatively high minimum entry deposit. However, among the disadvantages of ActivTrades is the absence of copy trading and the fact that it is unavailable for US clients. It is a big financial organisation that enables a market participant to enter the financial market. They assist these entities in executing large trade orders, channelling liquidity from various sources and consolidating order books to process significant orders quickly and safely at the minimum slippage possible. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.

We also have a bespoke BNP Paribas prime brokerage platform that is tailored specifically to over-the-counter equity derivatives transactions. One of the key things we decided to do after the acquisition was to build from one common source the global prime brokerage platform. The main focus of our business is equity, equity linked convertible bonds, as well as a mix of fixed income assets, including corporate bonds and high yield. We are largely focused on liquid products that it makes sense to finance in a portfolio.

The ability to use more leverage, get introduced to capital, have access to research, access to larger short locates, execute large trades are all benefits that all prime brokers can provide. Building relationships to build awareness of the hedge fund and climb up to the top tier prime broker as assets and performance grows. Top prime brokers come with a slew of benefits including building your reputation as a brand. Much of the relational benefits is implied as top prime brokers are a part of the largest institutional investment banking firms with access to high-net worth individuals, businesses, organizations, and massive pools of capital. An obvious alternative was to follow the example of the traditional investment management industry and appoint a creditworthy, third party bank with a large balance sheet to safe keep the cash and fully paid (or unencumbered) assets of the fund.