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.”
 


In Depth

Q&A: Brevan Howard’s Charlotte Valeur Talks Strategy

Sep 18 2014 | 11:18am ET

Charlotte Valeur chairs the board of Brevan Howard Credit Catalysts, an LSE listed...

Lifestyle

Hedgies Rock Out For Children's Charity

Sep 15 2014 | 8:40am ET

It's that time of year again—when hedgies trade in their spreadsheets for guitars...

Guest Contributor

Volkered: How Financial Sector Reforms are Creating Opportunities for Hedge Funds

Sep 16 2014 | 11:28am ET

New regulations have dramatically curtailed proprietary trading activity in investment...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

September 2014 Cover

The London Whale: Rogue risk management

Credit default swaps brought down the London Whale and cost JPMorgan $6.2 billion. Here is how it happened.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.