Results of 2011 Global Custodian OTC Derivatives Prime Brokerage Survey Published

This is the third anniversary of our OTC Derivatives Prime Brokerage Survey, which seeks to measure client perceptions regarding the services provided by their OTC derivative prime brokers. However, it is almost certainly the last rendition of the survey in its current form*. By this time next year, centralized clearing through central counterparty clearing houses (CCPs) will be mandatory in all but a fifth to a third of the OTC derivatives traded in the United States, and much of the market in Europe will also be centrally cleared ahead of the deadline for mandatory clearing there. And for the past two years the coming of centralized clearing has dominated the discourse in business of OTC Derivatives Prime Brokerage. However, unlike last year, the discussions are more substantive now that prime brokers and hedge fund clients alike, both finally are gaining some experience in the practice. Clearing houses in both Europe and the United States can already clear interest rate swaps, credit default swaps and equity derivatives, and in varying combinations. Despite the likelihood of mandatory clearing being effected in the second half of 2011 in the United States and by the end of 2012 in Europe, the future evolution of the practice remains uncertain. An in-depth article on this topic accompanies the results of this year’s survey can be found here.

Once again our survey grew this year, with 165 authenticated responses received from the clients of eight service providers. On the basis of this data, we were able to rate four providers and to discuss a further five. Those ratings and the accompanying Best in Class awards are based on completed questionnaires submitted by respondents. They were asked to rate the services provided to them by OTC derivative prime brokers across 50 questions divided into eight service areas (client service, credit intermediation products and counterparties, portfolio margining, foreign exchange prime brokerage, operations, reporting, technology and value). Ratings are available in a total of 19 categories based on client size, investment strategy, regional location and OTC derivative agreement type. Prime brokers are eligible for a rating in a particular category subject to obtaining a minimum of five responses in each category, and provided they collect at least ten responses overall. To be eligible for a Top Rating, a provider has to secure a weighted average score that equals or betters the combined overall weighted average score of all the service providers taking part in the survey in any category. Commended ratings are based on a mixture of scores, comments and other factors. OTC derivative prime brokers are also eligible for Best in Class awards, which single out providers for excellence in servicing clients in each of the eight service areas in the 18 separate categories. To be eligible for a Best in Class award, a provider must secure a minimum of five responses in that category (such as a region), and a weighted average score within the service area (such as client service) in any category that is equal to or better than the weighted average score of all providers in that combination of service area and category. Providers are eligible for up to 144 Best in Class awards.

Scores are weighted in two ways. First, credit is given for scoring well in areas named as important in each service area by all respondents in the completed, qualifying questionnaires. Respondents themselves are also weighted according to their size and sophistication, which is assessed by a number of factors, including asset size, number of investment strategies pursued and number of OTC derivative prime brokers used.

To see the full survey results, subscribers to GlobalCustodian.com should click here, but the summary results are:

*   While prime brokers will continue to service at least that part of bilateral, non-clearable OTC derivative business that remains economically attractive and the Global Custodian Survey of OTC Derivatives Prime Brokerage will continue to ask questions of users of those services, the 2012 edition of the survey is likely to focus much more on the quality of the clearing broker services provided by the investment banks that are rated here.