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{{anat|PB|}}{{anat|brokerage|}}''This article is largely about equity [[prime brokerage]], because that’s mainly what the [[JC]] knows about.'' <br> | {{anat|PB|}}{{anat|brokerage|}}''This article is largely about equity [[prime brokerage]], because that’s mainly what the [[JC]] knows about.'' <br> | ||
A prime broker | [[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]]. | ||
Many [[legal eagles]] who really should know better don’t understand this, and it makes for lengthy and pointless negotiations. | |||
===What prime brokers do=== | ===What prime brokers do=== | ||
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 | *'''[[Bank account]]s''': running a multi-currency cash account - from which they can lend their clients money. | ||
*'''[[Bank account]]s''': running a multi-currency cash account - from which they can lend money. | *'''[[Margin lending]]''': lending on margin to [[hedge fund]]s who want to get exposure to securities without funding it (you know: so they can achieve (cough) [[leveraged alpha]]); | ||
*'''[[Margin lending]]''': lending on margin to [[hedge fund]]s who want to | *'''[[Stock lending]]''': lending the {{tag|hedge fund}} stocks it needs to settle [[short sale]]s. | ||
*'''[[Stock lending]]''': lending the {{tag|hedge fund}} | *'''[[Synthetic prime brokerage]]''': Providing the {{tag|hedge fund}} with [[derivative]] exposure to assets through [[synthetic equity derivatives]] (also called “[[CFD]]”s). This may involve accepting [[give-up]]s and [[give-in]]s from other [[executing broker]]s. | ||
*'''[[Synthetic prime brokerage]]''': | |||
*'''[[Swap]]s and {{tag|ETD}}''': Providing general exposure to swaps, futures, options and that sort of thing. | *'''[[Swap]]s and {{tag|ETD}}''': Providing general exposure to swaps, futures, options and that sort of thing. | ||
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===Why [[prime broker]]s do it=== | ===Why [[prime broker]]s do it=== | ||
'''[[Prime brokerage]] is a ''financing'' business'''. This is the key to it: ''to [[lend]] | '''[[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 n the first place. | ||
You can lend them [[money]] — ''explicitly'', through [[cash]] [[margin loan]]s, or ''implicitly'' through [[equity derivative]]s, and you can [[Securities lending|lend them securities]] so they can short-sell (also explicitly, through an outright [[stock loan]] or implicitly through [[equity derivative]]s). All this so your fund can generate — ahh — “[[alpha]]”<ref>Editor’s note: actually ''“[[vega]]”''.</ref> | You can lend them [[money]] — ''explicitly'', through [[cash]] [[margin loan]]s, or ''implicitly'' through [[equity derivative]]s, and you can [[Securities lending|lend them securities]] so they can short-sell (also explicitly, through an outright [[stock loan]] or implicitly through [[equity derivative]]s). All this so your fund can generate — ahh — “[[alpha]]”<ref>Editor’s note: actually ''“[[vega]]”''.</ref> | ||