A prime brokerage firm or prime brokerage house works with the help of a prime broker. The principal advantage of availing the services of a prime broker is that the securities clearing services of hedge fund offered by the prime broker is operated in a centralized fashion and the collateral necessities for the hedge fund are cleared among all the transactions supervised by the prime broker.
In return, the prime broker receives a fee for funding both the short term and long term security and cash positions of the customer. Sometimes, the prime broker also charges some fees for clearing services and other types of services. This fee is commonly termed as spread.
The products and services offered by the prime brokerage firms can be categorized into the following types:
Financing (Facilitation of leveraging of customer’s assets)
Global custody (which includes asset servicing, custody, and clearing services)
Operational Support Services
Customized technology services
Additionally, the prime brokerage firms offer certain value added services, which include the following:
Office Premises Leasing and Servicing (Leasing of commercial real estate)
Consultancy or Advisory Services
Advisory services related to risk management
The concept of prime brokerage firms was introduced in the United States in the latter part of 1970s. A number of investment banking firms adopted the concept, which included Merrill Lynch, Bear Stearns, Lehman Brothers, Morgan Stanley, as well as Goldman Sachs.
The earliest prime brokerage firm was formed by Merrill Lynch International Bank in the latter part of 1980s in London.
The fees or spreads are charged by the prime brokers on the following basis:
Customer deposits (credit balance)
Customer loans (debit balance)
Customer short selling (short balance)
CFDs (Contract for difference) and swaps
The leading prime brokerage firms include the following:
Banco Espirito Santo
Bank of America
CIBC World Markets
JP Morgan Chase
Jefferies & Company
RBC Capital Markets
Last Updated on : 27th June 2013