SEC no-action letter relating to prime brokerage

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One of the sacred artefacts of US prime brokerage; deep lore that we foreigners ought not speak.

But.

It does have a rather succinct description of what prime brokerage, for the most part, is. Made somewhat succincter, the JC reads the gist as follows:

Prime brokerage is the process by which a registered broker-dealer clears and settles of securities trades for its customers. It involves three distinct parties: the prime broker, the executing broker, and the customer.

The prime broker is a registered broker-dealer that clears and finances the trades the customer has executed with an “executing broker” — another registered broker-dealer at the customer’s request.

Each executing broker receives a letter from the prime broker agreeing to clear and carry each trade placed with it by the customer, where the customer directs delivery of money or securities under the trade to be made to or by the prime broker, to an account the customer maintains with the prime broker.

Orders placed with the executing broker are effected through an account with the executing broker in the name of the prime broker for the benefit of the customer.

When a customer places an order with the executing broker it informs the prime broker who records the transaction in the customer’s prime brokerage account and in an account with the executing broker.