Prime brokerage risk

Prime brokerage risk

Hedge funds’ trades are working again after worst day in

Bear Stearns and Lehman Brothers’ failures reflect the truth of prime broker insolvency. Many hedge funds work with just one prime broker, while others work with two or more. The disastrous implications of failing to properly fix prime broker insolvency danger have recently become all too public for many hedge funds. This article discusses some of the threats that prime broker insolvency poses to hedge funds, as well as possible mitigation strategies.
(1) clearing and settlement; (2) financing; and (3) custody are the distinguishing characteristics of the prime brokerage partnership (and the most relevant prime brokerage services). Transactions may be conducted with multiple executing brokers while clearing and settlement is centralized by a single prime broker using clearing and settlement services. Margin loans, securities loans (for example, for short sales), repurchase agreements, and OTC derivatives are common sources of funding for prime brokers (via intermediation and embedded leverage). Hedge funds often position assets in the custody of a prime broker for convenience and to facilitate access to capital.

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Prime brokerage is the umbrella term for a set of services provided by investment banks, wealth management companies, and stock dealers to hedge funds that include the opportunity to borrow securities and cash in order to invest on a netted basis and earn an absolute return. The prime broker acts as a centralized securities clearinghouse for the hedge fund, netting the hedge fund’s collateral requirements across all of the prime broker’s transactions. These two features are beneficial to their customers.
The prime broker earns commissions (“spreads”) on the client’s margined long and short cash and security positions, as well as charging fees for clearing and other services in some cases. It also makes money by rehypothecating the hedge funds’ already serviced margined portfolios and charging interest on the borrowed securities and other assets. 1st

A sell-side perspective on clearing, xva and risk

Securities lending, custody & settlement, margin funding, execution and clearing services, accounting, and portfolio analytics are among the services provided by Equities’ Prime Services division to hedge fund, futures, and execution and clearing clients.
The successful candidate will join the Risk team, which oversees these companies, and will play a key role in both day-to-day risk management and platform growth. The Risk Group is a multinational organization with offices in London, New York, Chicago, and Hong Kong.

Complacency about prime broker risk could kill hedge

Hedge funds and other professional investors need the opportunity to borrow securities and cash in order to invest on a netted basis to generate an absolute return. Prime brokerage is the common term for a packaged package of services provided by investment banks and securities companies to hedge funds and other professional investors. The prime broker acts as a centralized securities clearinghouse for the hedge fund, netting the hedge fund’s collateral requirements across all of the prime broker’s transactions. These two features are beneficial to their customers.
The prime broker earns commissions (“spreads”) on the client’s margined long and short cash and security positions, as well as charging fees for clearing and other services in some cases. It also makes money by rehypothecating the hedge funds’ already serviced margined portfolios and charging interest on the borrowed securities and other assets.
Hedge fund leverage is facilitated by prime brokers, mainly by loans backed by their clients’ long positions. In this case, the Prime Broker is at risk of losing money if the value of the collateral used as insurance falls below the loan value and the client is unable to repay the debt. Operational risk and reputational risk are two other types of risk in Prime Brokerage.

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