The prime brokerage model has seen steady evolution in the last few years, but as securities industry regulations come into force this year and the next, the evolution is going from a gallop into a sprint.
As part of this evolution, universal banks that offer synthetic and cash prime brokerage are finding favor with hedge fund clients that have historically used the more traditional broker-dealer model.
J.P. Morgans prime finance division has seen significant growth since the launch of its London-based operation in June 2011. Following its acquisition of Bear Stearns in March 2008, the universal bank secured the top slot in the U.S. but only had a thin presence in Europe. The basis of this extended offering was a combination of the liquidity trading function with the prime and equity finance business using synthetics.
Twelve months after the launch, the prime broker had 30 clients in Europe with a further nine in the process of signing up, compared with its original target of 25 by the end of 2012, and a potential client base of about 60.
The prime broker is still keen to take the No. 1 slot in Europe from Goldman Sachs, Credit Suisse and Morgan Stanley, which have offered a traditional broker-dealer model.
In an article in the Financial Times 12 months after its launch, European clients of J.P. Morgans prime brokerage business told the paper they had been drawn in by a mix of attractions. They are fair and efficient with keen pricing, and they brought in three of the leading lights of the industry from Lehman Brothers, said one big client.
Fund managers and bankers say the crisis created opportunities for other blue-chip banks with the resources to invest in the infrastructure required to participate in this arena, with those banks that have stronger credit ratings now reaping the benefit of being seen as a reliable counterparty, the FT report added.
J.P. Morgans intention is to align the synthetic and cash prime brokerage platform in light of regulations such as Basel III, the European Securities Markets Authority (ESMA) short-selling guidelines and the Alternative Investment Fund Managers Directive (AIFMD).It is not just prime brokerage, says Jonathan Cossey, managing director, Equity Finance, Prime Brokerage, J.P. Morgan. It’s about the monetization of the prime brokerage platform and managing risk, he tells Global Custodian.For the investment manager, it is about global liquidity oversight and more market access, not just money market but other types of instruments and services including collateral transformation, risk management and rehypothecation.
As part of a tech plan, J.P. Morgan is currently undergoing a consolidation of its prime brokerage, synthetic and equity finance platforms. The three-year plan is halfway in.
“We’re building something with our eye on the capital directives, Cossey says. There are three important elements to this: capital ratios, liquidity coverage ratios, net stable funding ratio. We also have a significant capital base, [and] the ability to access increasingly diverse liquidity pools aligned with strong credit rating is increasingly a competitive advantage.
“This is important because capital is increasingly finite,” Cossey continues. “Capital will cost more. In addition, hedge investors want to see assets protected. As a result of these regulations pushing up the cost of capital and the requirement from investors for greater asset protection, we have seen a doubling of the combined synthetic and cash prime brokerage offering since the launch in Europe.”
J.P. Morgans share of the European prime brokerage market increased in 2012, up to 5.1% from 3.7% in terms of funds and to 5.7% from 3.4% with regard to assets, according to Hedge Fund Research data obtained by HFM Week.
In Europe, according to HFR, for the fourth quarter of 2012 leaders by funds are Morgan Stanley (22.2%), Goldman Sachs (16.2%), Deutsche Bank (12.9%) and J.P. Morgan (5.1%) compared to the fourth quarter of 2011, led by Morgan Stanley (25.7%), Goldman Sachs (15.9%), Credit Suisse (13.1%) and J.P. Morgan (3.7%)
In Europe by assets for the fourth quarter Morgan Stanley led with 47.5%, followed by UBS (16.1%), Goldman Sachs (10.2%) and J.P. Morgan (5.7%) compared to the fourth quarter of 2011 with Morgan Stanley (50.9%), UBS (14.1%), Goldman Sachs (9.9%) and J.P. Morgan (3.4%).
Similar universal banking offers have been available from HSBC and Citi, which have also seen their market shares increase.
(JDC)