Prime Brokers Challenged By Changing HF Landscape

Sep 23 2013 | 10:45am ET

Prime brokers face challenges in a changing hedge fund industry and regulatory landscape, and how they deal with those challenges is the subject of a recent Ernst & Young survey.

E&Y polled executives from eight leading prime brokers and found that 70% have a formal acceptance process for new clients, 44% use a semi-automated process for tracking the “onboarding” of new clients and none of the firms polled has a fully-automated process.

Only one prime broker surveyed is a distinct business unit and the majority (57%) have service-level agreements between centralized back-office support and prime business lines. All participants use a broker/dealer structure combined with an international entity that allows them to move their derivatives business offshore, “effectively reducing their balance sheet burden and lowering regulatory capital.”

E&Y found that 71% of prime brokers have no method of notifying their treasury groups of large cash inflows and outflows while the 29% that does uses email and phone calls, suggesting it's an area that could benefit from better data management technology.

The survey showed prime brokers have no standards method of allocating revenue between the securities lending desk and the source of the long and that collateral agreements are usually written into the prime brokerage agreement. However, hard-to-borrow securities require collateral negotiation on a case-by-case basis.

More than 70% of the respondents offer lockup agreements, with the most popular terms being 30, 60 and 90 days, though 29% provide lockups for as long as 365 days, depending on the client relationship.

Three-quarters of prime brokers surveyed offer margin relief to their clients beyond the Federal Reserve’s Regulation T margin limit of 50% through enhanced leverage and portfolio managing. 

Said Arthur Tully, co-leader of EY’s global hedge funds services, in a statement: “Firms must learn to adapt to the pressures on fees and the multi-prime trends that have resulted from the changes in the hedge fund industry. While firms have started to recognize these challenges, the survey reinforces the need for brokers to develop ways to better integrate their systems with client’s information and enhance their ability to quantify associated operational costs.”
 


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