Investment Manager Sees Changing U.S. Prime Brokerage Model

As regulations and emphasis on profitably continue to drive decisions over banks prime brokerage businesses, doubts have arisen over whether it will remain a stand-alone-business, according to a leading U.S. investment manager.
By Joe Parsons(2147488729)
As regulations and emphasis on profitably continue to drive decisions over banks prime brokerage businesses, doubts have arisen over whether it will remain a stand-alone-business, according to a leading U.S. investment manager.

A number of high profile banks have recently scaled back their prime brokerage business, including Credit Suisse and Goldman Sachs. New rulings such as Basel III are set to make prime brokerage in areas such as OTC clearing more expensive, with the balance sheet intensive activity depressing returns of the business. This could in turn lead to new changes in how banks offer services.

“The U.S. prime brokering business from my perspective seems to be morphing into relationship banking, where they are interested in offering prime brokerage services as one in a suite of products to offer clients,” says Michael O’Brien, director of global trading, Eaton Vance.

Relationship banking is a strategy used by banks whereby they cross-sell financial products and services to strengthen their relationships with customers. In this scenario, it could become more difficult for hedge funds to find specific prime brokers for financing purposes because traditional services would be bundled and sold with other services they may not need.

“If you are starting a shop and all you are doing is looking for just prime brokering services, then this might be more challenging. The days of starting a hedge fund from your garage is long gone, and even a firm with $150 million is numbered as prime brokering becomes more of a bank relationship product instead of a product that drives revenue,” adds O’Brien.

The impact of regulation on prime brokerage is being felt across Europe as well, in which a decline in the number of specialist prime brokers, combined with central clearing mandates, could significantly effects the buy-side.

“It is going to be a tough time for investment managers that mainly use leverage, because they will have to find a true partner to support them,” says Gildas Le Treut, global director of prime clearing, ABN Amro Clearing.

“If they are using products that are balance sheet extensive, and have to clear their interest rate swaps, there will be a very limited number of prime brokers that can cover all their needs.”

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