Prime Brokerage Survey SURVEY | PRIME BROKERAGE

Prime Brokerage Survey SURVEY | PRIME BROKERAGE is completed with clients’ of the hedge funds concerned most likely unaware and certainly unaffected. However, it is clear that in the current climate, some providers at least have found it hard to maintain a cool exterior. The last twelve months have seen a growing number of rumours and stories of major prime brokers asking large numbers of clients to leave at relatively short notice. Similarly pricing and availability of credit, the willingness to accept deposits and sudden imposition of drastic increases in minimum revenue/fee levels are talked about by competitors and clients like. The facts of individual stories may be subject to interpretation and distortion by competitors. However, the number and consistency of information, as well as a body of anecdotal evidence, point clearly to the notion that something out of the ordinary is taking place. A reassessment of relationships within individual prime Back to basics brokers and a reshuffling of clients among them are underway. Whether what has happened to date represents the New rules and regulations are forcing hedge funds and bulk of any adjustment that is needed or prime brokers to re-evaluate who they work with and why. is merely the precursor of more drastic changes still to come remains to be seen. In any event from a client perspective 014 was a solid year for hedge brokerage, deciding at each stage how there is no room for complacency, funds continuing the steady much capital to allocate and how each however big the firm. 2recovery from the financial crisis. unit needs to manage total leverage, In the past that would have been enough deposit and funding requirements. Old approach, new organisation to encourage continued growth by prime Individual business units then have to The changes taking place within the brokers to support new and existing decide how the overall approach impacts industry as a whole are causing different funds. But these are not ordinary times. on specific client business relationships banks to adopt different and increasingly The regulatory juggernaut kicked off by and in some cases hard choices have differentiated strategies, in some cases the crisis is beginning to be made flesh, already had to be made. driven by and in others in response with short term consequences almost Regular evaluation of client to, organisational structures. This starts wholly negative for hedge funds and relationships should be part of any at the very beginning of the process, prime brokers alike. While the detailed business, and among many prime with the regulations themselves. Many rules have yet to be finalised in many brokers the process is well established. of the major prime brokers are part key areas, the basic shape is now clear. In normal circumstances decisions of organisations that have formidable As a result the world’s largest banks are to reduce commitments to individual power to lobby for the best outcomes beginning to adjust their activities to take clients are a confidential matter that is for themselves and their clients. account of capital ratios, leverage ratios managed in such as way as to attract little However, this power is being used and net stable funding requirements. or no publicity. Decisions are ‘mutually in different ways depending on the Typically this process starts at the very agreed’, adjustments to prices and priorities of the overall organisation. In top, and works its way through to availability are accommodated by iterative some cases this will work to the possible different business units, including prime adjustment and an evolutionary process benefit of prime broker business. In 46 globalcustodian.com Global Custodian | Hedge Funds 2015 SURVEY | PRIME BROKERAGE other circumstances the approach will to put excess deposits ‘to work’ in order they need them, not just in good times. largely ignore effects on that business to to generate maximum returns. For these Likewise prime brokers need confidence gain better benefit elsewhere within the institutions hedge fund clients offering that they can enjoy a sufficient ‘share of organisation. The level of investment in a stable secured loan demand may wallet’ to support the commitment of dealing with the regulators is therefore continue to offer an attractive outlet. increasingly expensive talent and capital now an interesting indirect measure of That is not the same for all. to get things done. business commitment by prime brokers. One way to increase wallet share is The second indicator of commitment, Brokers act, clients react to offer more services and do so in a which can also only be assessed At the same time that prime brokers way that is properly integrated whether indirectly by clients, is how much are looking hard at exactly how much in terms of business organisation or capital is devoted to prime brokerage. and what type of business best suits accounting or both. This is reflected in It is here that actions speak louder than their institution, hedge funds are also the number of organisational changes words. Clearly capital is scarcer for reassessing their requirements. In the being made within many prime brokers. everyone, return thresholds need to be immediate aftermath of the financial One of the key challenges for many increased across all businesses to deliver crisis the notion of a single prime broker of the largest prime brokers is how acceptable results overall. Many hedge relationship became unacceptable to best to bring the full capabilities of the funds believe that it is part of their many funds and indeed their clients. firm to bear on the relationship with prime brokers’ role to find solutions to This led to a relative proliferation of a particular hedge fund when it may these issues that allow them to continue relationships. Initially this appeared run counter to a range of internal profit to execute investment strategies that to benefit everyone, as prime brokers and organisational constraints. Even will deliver returns to their clients. expanded their client lists and hedge less complex companies sometimes Leading prime brokers also recognise funds reduced their dependency on find it hard to position their own their role as problem solvers. However, single sources of service and finance. organisations in ways that optimise the for some prime brokers the overall However diversifying relationships client experience on the one hand and relationship value may not support a has some significant downside for all properly reflect the totality of a client people intensive search for compromise parties as well. Parallel operational relationship on the other. Yet this is solutions, and in some cases with some due-diligence and compliance efforts exactly what the new rules effectively strategies solutions that are commercially have become increasingly expensive for require, whether viewed from a risk viable to both parties may in fact simply hedge funds. Workflows become more management, capital commitment or not exist. Hence the apparently drastic complex and collateral optimisation may profit perspective. steps now being undertaken by some be prejudiced unless new technology Some banks have chosen effectively prime brokers towards some clients. or many people can be brought to to establish a new organisation rather Of course not all prime brokers bear. Some hedge fund administrators than alter reporting lines or accounting are affected in the same way by the have proved more effective than others practices. One exponent of this is Société new rules, whether in breadth or at handling multiple prime broker Générale, who after acquiring Newedge scale. Opportunities clearly exist for relationships established by their clients. created a business that incorporates mini-primes and introducing firms to From the prime broker perspective some all elements of their product offerings assist some clients as well as allowing of these new relationships may still be to hedge funds within a single new larger banks with fewer balance small, even when the client is large structure. As James Shekerdemian, sheet constraints and smaller firms to overall. Opportunities for growth may Managing Director and Global Head become more active and effective in the not have turned out to be as interesting of Prime Brokerage Sales commented market. As Noel Kimmel, global head as was anticipated; and there are simply recently, “we felt that in the market of Prime Services at Cantor Fitzgerald more relationships to manage, and more environment that exists, to serve our notes “While we are subject to new problems to solve, without a suitable hedge fund clients in the manner they regulations, as a partnership, we are not level of revenue to support everything. expect, we have to be able to coordinate affected to the same degree as some As a result a consistent theme across all parts of the bank and have organised of the larger banks and can be more the industry is the re-emergence of the to do this.” Others including BNP Paribas accommodating.” Even among the larger importance of relationships, from both and BNY Mellon have also sought to firms some are driven by deposits and sides of the table. Hedge funds need create broader groupings around custody others by liabilities. Where deposits are to know and be confident that their and clearing services, which are an the driver firms are looking at how best prime broker will be there as and when important aspect of effective service for Global Custodian | Hedge Funds 2015 globalcustodian.com 47 SURVEY | PRIME BROKERAGE hedge fund clients and prime brokerage a smaller number who have decided to clients with “meaningfully differentiated business. As various people have noted take proactive steps. prices” for particular services or these broader organisations facilitate The first group believe that their assurances of credit availability. At the and encourage much more strategic prime brokers will in due course explain same time the more professional clients discussions with more senior individuals both the final details of the problem are looking harder at their own activities within client organisations around issues and their proposed solution.

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