Diversification is now the name of the prime brokerage game. From a traditionally one-on-one hedge fund/prime broker partnership, the fears of partner default raised since the beginning of the financial crisis have convinced many hedge funds that putting all their eggs in one basket is no longer a canny way to do business. The concentration risk of a single-prime approach is not one that many institutions are willing to bear in the current climate, and multi-prime is now increasingly being seen as the way forwards.
Naturally, this has resulted in a few new opportunities for brokers in a famously low market – but they must be approached with caution. While many funds may be looking to add partnerships in addition to their established agreements with the traditional larger players, they also require the utmost stability, experience and professionalism from any possible new partner. Operational transparency and depth of technology are major factors in making the decision.
So what do prime brokers, both large and small, need to do to capitalise on this window of opportunity? The most important element in creating and maintaining these new relationships is to be sure of what the fund wants. At this time, most funds expect delivery of an extended product range, with multi-asset and multi-market access as key components; a clear and comprehensive risk management strategy, including transparency of internal processes; and the ability to track data and produce the necessary reports. Creating value-added services that stand out from the crowd is a difficult task for those brokers without the technology to cope with client demands.
This increasingly complex environment requires key and targeted investment from the prime broker community, including a review and potential upgrade of their existing IT infrastructure. While the importance of developing the prime brokerage platform within the overall technological structure of the broker/dealer including execution, clearing and settlement, risk management and securities lending capabilities cannot be underestimated, prime brokers must also prioritise the specific requirements of this business.
Transaction processing and finance processing services should be at the core of the offering, ensuring management of the full pre- and post-trade lifecycle for all prime-focused transactions, and providing all securities lending and cash management functionalities. Matching, splitting and netting should be automatic, offering improved control on an intra-day basis, and reducing exposure to fails, counterparty risk and reputational risk/customer satisfaction issues.
Funds want to be sure that their prime brokerage services are fully scalable. They must be able to expand their operations as their business grows in terms of trades per day, without costly additional recruitment, and they need to be confident that the underlying prime brokerage technology can service their operations in new jurisdictions and with new products as and when required. A prime brokerage offering must also be able to respond to new market and regulatory demands and utility updates as necessary with no inconvenience to the client.
In such a continually shifting landscape, funds need to have full confidence in their chosen prime brokers, with a multi-prime model that is secure, cost-effective, operationally transparent and adaptable enough to cope with any eventuality.
Paul ClarkProduct ManagerBroadridge Financial Solutionspaul.clark@broadridge.com