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{{anat|PB|}}''This article is largely about equity [[prime brokerage]], because that’s mainly what the [[JC]] knows about. Those wanting to know more about l’affaire [[Archegos]] | {{anat|PB|}}''This article is largely about equity [[prime brokerage]], because that’s mainly what the [[JC]] knows about. Those wanting to know more about l’affaire [[Archegos]] can go to that article, but here — and the sister article on [[synthetic prime brokerage]], might be a useful backgrounder, though to be honest the [[Archegos]] thing, and the {{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Credit Suisse management report into it}}, is a pretty neat backgrounder all by itself.''<br> | ||
[[Prime brokerage]] is, first and foremost, a ''financing'' business. A [[prime broker]] [[margin loan|lends money on margin]] to [[hedge fund]]s so they can invest in the market. It can do this directly, by making cash or stock loans, or “[[Synthetic equity swaps|synthetically]]”, using swaps, but either way the PB does not have any market risk on its client’s positions. It makes its money through commissions and optimising its [[cost of funding]]. | [[Prime brokerage]] is, first and foremost, a ''financing'' business. A [[prime broker]] [[margin loan|lends money on margin]] to [[hedge fund]]s so they can invest in the market. It can do this directly, by making cash or stock loans, or “[[Synthetic equity swaps|synthetically]]”, using swaps, but either way the PB does not have any market risk on its client’s positions. It makes its money through commissions and optimising its [[cost of funding]]. | ||
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Okay, let’s guess: Wikipedia says the term, and concept, dates back to the New York broker Furman Selz which offered a centralised service for money managers in the seventies, the idea being to centralise your back office functions and trade flow into a single place — a “prime” broker, we suppose. But it is a guess. These days large hedge funds have multiple prime brokers ([[Archegos]] had seven!!) so the adjective has lost some of its cachet. | Okay, let’s guess: Wikipedia says the term, and concept, dates back to the New York broker Furman Selz which offered a centralised service for money managers in the seventies, the idea being to centralise your back office functions and trade flow into a single place — a “prime” broker, we suppose. But it is a guess. These days large hedge funds have multiple prime brokers ([[Archegos]] had seven!!) so the adjective has lost some of its cachet. | ||
==What prime brokers do== | |||
Supplementary to their core lending operation, prime brokers — fondly known in the trade as [[PB|PBs]] — provide the following services: | Supplementary to their core lending operation, prime brokers — fondly known in the trade as [[PB|PBs]] — provide the following services: | ||
*'''[[Custody]]''': looking after the {{tag|hedge fund}}’s “long” investment portfolio much of which they will have financed (this sounds kind, but the PB’s ulterior motive is to have control of and [[Security interest|security]] over all those lovely assets) | *'''[[Custody]]''': looking after the {{tag|hedge fund}}’s “long” investment portfolio much of which they will have financed (this sounds kind, but the PB’s ulterior motive is to have control of and [[Security interest|security]] over all those lovely assets) | ||
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[[Prime broker]]s often also have a consulting arm which helps a nascent {{tag|hedge fund}}s get off the ground: setting it up, finding offices, hiring people, engaging lawyers, recommending (cough) [[prime broker]]s, and [[capital introduction]]. | [[Prime broker]]s often also have a consulting arm which helps a nascent {{tag|hedge fund}}s get off the ground: setting it up, finding offices, hiring people, engaging lawyers, recommending (cough) [[prime broker]]s, and [[capital introduction]]. | ||
==Why prime brokers do it== | |||
'''[[Prime brokerage]] is a ''financing'' business'''. This is the key to it: ''to [[lend]] clients [[money]]'' so they can make investments. All going well the client keeps all the profits and losses from their investments, but pays the PB interest and repays [[principal]]. Client lets the PB look after the assets so it can monetise them, thereby lowering its costs of providing the funding in the first place. | '''[[Prime brokerage]] is a ''financing'' business'''. This is the key to it: ''to [[lend]] clients [[money]]'' so they can make investments. All going well the client keeps all the profits and losses from their investments, but pays the PB interest and repays [[principal]]. Client lets the PB look after the assets so it can monetise them, thereby lowering its costs of providing the funding in the first place. | ||
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*'''Prime brokerage is margin lending''': The reason the [[prime broker]] wants your assets is not just for [[security]], but so it can use them to reduce its own internal cost of funding. The lower its own cost of funding, the less it has to charge you. So it is in your interest to let the prime broker reuse your assets, if you are allowed to. | *'''Prime brokerage is margin lending''': The reason the [[prime broker]] wants your assets is not just for [[security]], but so it can use them to reduce its own internal cost of funding. The lower its own cost of funding, the less it has to charge you. So it is in your interest to let the prime broker reuse your assets, if you are allowed to. | ||
==What prime brokers ''don’t'' do== | |||
*'''Act as {{tag|PB administrator}}''': While they look after assets, prime brokers don’t calculate {{tag|NAV}} (that’s the {{tag|PB administrator}}’s job) | *'''Act as {{tag|PB administrator}}''': While they look after assets, prime brokers don’t calculate {{tag|NAV}} (that’s the {{tag|PB administrator}}’s job) | ||
*'''Act as {{aifmdprov|depositary}}''': [[PB]]s, which tend to be situated in London, or New York, generally cannot act an official {{aifmdprov|depositary}} for {{tag|AIFMD}} purposes (though they may get delegated the safekeeping role and may act as a {{aifmdprov|depo-lite}}) | *'''Act as {{aifmdprov|depositary}}''': [[PB]]s, which tend to be situated in London, or New York, generally cannot act an official {{aifmdprov|depositary}} for {{tag|AIFMD}} purposes (though they may get delegated the safekeeping role and may act as a {{aifmdprov|depo-lite}}) | ||
*'''Act as an [[executing broker]]''': They don’t themselves work equity orders for their clients (though their compadres across the [[Chinese wall]] in the equities trading division at the same investment bank almost certainly will) | *'''Act as an [[executing broker]]''': They don’t themselves work equity orders for their clients (though their compadres across the [[Chinese wall]] in the equities trading division at the same investment bank almost certainly will) | ||
{{sa}} | |||
*[[Prime broker solvency]] | |||
*[[broker/dealer]] | *[[broker/dealer]] | ||
*{{aimfdprov|Depositary}} | *{{aimfdprov|Depositary}} | ||
*[[Administrator]] | *[[Administrator]] | ||
*[[Prime broker - AIFMD Provision]] | |||
*Also [[Law of Property Act 1925]] | *Also [[Law of Property Act 1925]] | ||
{{ref}} | |||