This report presents a business model for an emerging idea in securities finance: agency prime brokerage. Instead of acting as principal for borrowing and lending transactions, with their concurrent balance sheet costs, prime brokers could move some business to an agency model where they arrange transactions between borrowers (hedge funds) and lenders (pension plans, fund managers and cash managers). The benefit is that prime brokers could charge a fee for this service without negatively impacting their balance sheet, and could apply balance sheet where needed to maintain consistent services for clients.
While conceptually straightforward, agency prime brokerage presents difficulties for borrowers, lenders and prime brokers themselves. In our review of the business model opportunity, we use our survey data to help understand how obstacles can be overcome and an agency prime brokerage model brought to successful fruition.
As Basel III regulations become more firmly implanted in the banking community, balance sheet management remains a top priority. Multiple strategies – including charging more, moving onto CCPs and acting as agent instead of principal – are all viable alternatives for prime brokers, so long as their hedge fund clients and lender counterparties will support their plans.
This report is part of the Finadium Executive Briefing series, providing briefings and analysis to the financial markets industry.
This report is 17 pages with 5 exhibits.
TABLE OF CONTENTS
■ Executive Summary
■ Prime Brokerage and Credit Intermediation
– The Agency Prime Brokerage Model
■ Hedge Funds Borrowers and Asset Holder Lenders
– The Borrower View
– The Lender View
■ Building a Model
– The Natural End-game
■ About the Author
■ About Finadium
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