September 2022

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Equity prime brokerage revenues have seen a sharp uptick in 2022, the result of market volatility that encourages both physical financing and synthetic positions by institutional clients. Recent financial disclosures show that if current trends hold, prime brokerage financing revenues will reach US$25 billion in 2022, up 17% over 2021.

The degree to which physical securities finance including stock loan and margin financing, and synthetic financing including total return swaps, are promoted has not been dented by Archegos losses, although risk controls have increased. Prime brokers are more adept than ever at optimizing their balance sheets while serving client interests.

The businesses of physical and synthetic financing are not fully separate: they rely on each other for hedges and to manage credit exposures. When facing hedge fund clients however, the incentives provided by Basel III and related domestic balance sheet regulations support the delivery of swaps transactions in place of physical financing liquidity where it makes sense. This report documents the extent to which that is happening and how it has changed over time.

This report should be read by market participants impacted by the prime brokerage business. Prime brokers will be interested to see growth patterns of physical and synthetic financing and institutional clients will benefit from a greater understanding of the importance of each business type to their prime brokers. Beneficial owners in securities lending can see why their revenues are increasing or decreasing at a different pace than prime brokerage revenues. Counterparties including agent lenders and other dealer swaps desks, as well as service providers, may also have an interest in understanding the scale of change.

Table of Contents

  • Executive Summary
  • Anecdotes and Financial Statements
    • – Methodology
  • The Physical Market
    • – The Value of Internalization
  • The Synthetic Market
    • – Archegos and Market Transparency
  • Projected Revenue Trends
  • About the Author
  • About Finadium LLC

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