What is Prime Brokerage Service?
A prime broker is the gateway to a wide range of products and services provided by an investment dealer to hedge funds, institutions and family offices. Prime brokers traditionally provided four core services:
1. Clearing, settlement and custody;
2. Margin financing;
3. Securities lending; and
4. Consolidated reporting.
Increasingly, however, new products and services are being added to the mix, such as fund administration, risk analytics, and capital introduction. These additional services are designed to further assist hedge fund managers to launch, grow and efficiently manage their fund’s operational, financing and reporting requirements.
Prime Broker’s Core Services
As hedge funds continue to expand their role in today’s capital markets, prime brokers globally are quickly revamping their products and services to meet hedge funds’ increasing requirements. A prime broker’s core services include clearing, settlement and custody, margin financing, securities lending and consolidated reporting. Today, this means providing a core service where hedge funds can access a wide range of markets and products, such as equities, fixed-income securities, commodities and currencies, as well as derivative products including options, futures and swaps.
In broad terms, the prime broker acts as a conduit between hedge funds and the marketplace. The prime broker typically provides clearing on behalf of the fund, may finance transactions, provide securities lending for short sales, and also provide custody services. A prime broker enables hedge fund managers to trade with multiple brokers and consolidate their securities and cash balances in one master account. This master account enables the prime broker to provide consolidated reporting, margin financing and efficient back-office processing. Since these services require significant capital investment, the majority of hedge funds outsource these services to a prime broker.
Source: AIMA-Canada Strategy Paper Series