Prime Brokerage

Posted in Finance, Accounting and Economics Terms, Total Reads: 976

Definition: Prime Brokerage

This term is used to describe the various services offered for hedge funds and other securities by investment banks and other financial institutions.

Services Offered:

• Execution and custody services of the hedge funds

• Provides hedge funds with the option of borrowing stocks and bonds, called Securities Lending, and the option to borrow money to buy the shares and bonds, called Margin Financing Capabilities

• Acts as an intermediary between investors, pension funds (who have shares to lend) and commercial banks (who are willing to lend money in the form of loans)

• Capital Introduction: Provided by teams to help in finding potential investors to assist in investing new funds

• Risk Management: They provide the estimation of risk involved in the hedge funds and the actions to be taken for it

• Client Services like understanding their goals and developing strategies to achieve them

The largest prime brokers are financial institutions and investment banks such as Goldman Sachs, J. P. Morgan and Morgan Stanley.

Lending cash and lending securities are different in terms of collateral and the further reporting required. Collateralization is very essential for prime brokers. The assets involved in the hedge funds are kept by the prime brokers as collateral. They are available to the prime brokers and can be transferred to their account in case of default. This provides better chance of getting back their investments rather than loans.

Choosing a Prime Broker:

Prior to the selection, due diligence is conducted and then opted. The various factors on which the prime broker is selected are:

• Credit Worthiness

• Price

• Type of securities to be borrowed

• Access to term lending


Hence, this concludes the definition of Prime Brokerage along with its overview.

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