US Prime Brokerage Survey: Customers, Capital and Business Models

Finadium
June 2017

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It’s not the Wild West anymore; US prime brokerage has matured. Prime brokers still provide core critical services to the professional and institutional investment community that include market access, execution, complex portfolio financing, liquidity and of course, leverage. But the provision of these services has changed since the peak years of 2006 to 2008. Balance sheet has become a finite and therefore valuable commodity, and prime brokers have developed new tools to measure its productive use.

For this report, Finadium surveyed US prime brokers and prime services providers to learn the current state of balance sheet availability for hedge fund clients, what makes a good customer, how prime brokers identify ideal clients and how transparent prime brokers are about costs with clients. Our interviews covered small and large prime brokers, top investment banks and regional brokers. We also included prime services providers that operate without a large investment banking franchise.

Regulation factored heavily into our survey results, from driving the balance sheet conversation to potentially impacting future directions for the industry. Respondents were unanimous that sensitivity to capital utilization and a recognition of the costs of capital have become an ingrained part of the culture. While some speculated that their firms would be able to take on more business with looser rules and would take advantage of greater flexibility, none expected that capital discipline would be abandoned.

The new approaches that prime brokers are taking towards balance sheet management should be well understood by clients, regulators, technology vendors, and competitors.

This report is 25 pages with nine exhibits.

TABLE OF CONTENTS

■ Executive Summary

■ New Capital Standards Change the Paradigm
– Measuring Leverage

■ Capital Stabilization

■ The Good Customer
– Modeling the Balance Sheet Impact

■ Transparency in the Cost of Capital
– Capital Efficiency and Employee Compensation

■ Alternatives to Accomplish Customer Goals

■ Regulatory Rollback and the Future of Prime Services
– The Value of Balance Sheet Management

■ About the Author

■ About Finadium