Global Custodian: Credit Suisse Named Top Prime Broker

Jul 1 2009 | 12:55pm ET

Credit Suisse is the favorite prime brokerage firm among hedge fund managers, with Deutsche Bank coming in a close second, according to the Global Custodian Prime Brokerage Survey, which was released today.

According to Global Custodian, which has conducted the annual survey for 16 years, responses were down by a quarter by comparison with 2008, and the survey suggests that the prime brokerage industry has decreased in line with the shrinkage of a hedge fund industry battered by shrinking asset values, redemptions and receding performance thresholds.

Top 11 Global Prime Brokers (Global Custodian Survey)

1. Credit Suisse
2. Deutsche Bank
3. Citi Prime Finance
4. J.P. Morgan
5. Barclays Capital Prime Services
6. Bank of America Merrill Lynch
7. Goldman Sachs
8. Morgan Stanley Prime Brokerage
9. UBS
10. Newedge
11. RBC Capital Markets

But the survey also shows that the prime brokerage industry has undergone a seismic restructuring of its own. One fund in three had experienced the termination of a relationship with a prime broker during the year. This rose to more than one in two among the largest hedge funds.

But the most striking finding is the weakening of the stranglehold on the prime brokerage industry of Goldman Sachs and Morgan Stanley. Long dubbed a “duopoly,” the grip of the two investment banks on the industry had proved immune to repeated attempts by competitors to usurp their leadership position.

As recently as last year, Morgan Stanley and Goldman Sachs accounted for some of the highest number of responses, with Morgan Stanley collecting more than any other prime broker. In 2008 the two firms accounted for nearly 23% of responses. This year, they accounted between them for a less than 18%.

Among hedge fund clients of the bank responding to the survey, 43.6% said they had reduced their balances with Goldman Sachs. The only firm to see a bigger reduction of balances among their survey respondents was Morgan Stanley, with an enormous 70.2% saying they had cut their balances with the firm. The survey average was just 25.4%.

The survey suggests that the main factors behind the switch were anxieties about creditworthiness in the wake of the rescue of Bear Stearns and the collapse of Lehman Brothers, as well as changes in terms of business in September last year, as prime brokers scrambling to fund themselves found it hard to fund clients as well.

Among survey respondents that addressed the question, one in three offered “counterparty credit risk concern” as the reason for terminating a prime brokerage relationship.  However, one in eight named “terms changed by prime broker” as their reason for ending the relationship.

Unsurprisingly, the survey also shows that the main beneficiaries of the crisis of confidence in the former broker-dealers were those prime brokers backed by the balance sheet of a major bank: Barclays Capital, BNP Paribas and BNY Mellon-owned Pershing, but especially Credit Suisse, Deutsche Bank and J.P. Morgan.

J.P. Morgan took on another 200 large accounts in the last year, in addition to the clients it acquired with Bear Stearns. Nearly half of its survey respondents said they had increased their share of balances with the bank.

Credit Suisse, which has long pursued a policy of focusing on the largest funds, operated at a more measured pace, adding around 50 accounts, but saw the largest proportion of respondents claiming to have increased balances with the firm, at 55.6%. Deutsche Bank added over 80 clients, and more than half of its respondents increased balances with the bank. Pershing out on 30 clients Newedge, which is jointly owned by Credit Agricole and Société Générale, has grown its clientele by half in the last year.

Winning new clients was not without its difficulties. Although some clients were impressed by the transition, there were various gripes in the survey about what one called “time taken to open accounts.” Several respondents detected signs that their new providers were understaffed for coping with the flood of new business.

Ironically enough, however, the overall winner in terms of pleasing new clients was a broker-dealer. Jefferies & Company collected an average weighted score of 6.02 for the perception of the quality of the transition process by new clients, nearly 10% above average. This positive rating was achieved despite doubling its clientele in the last year, including the purchase of a raft of smaller funds from BNP Paribas, which offloaded them after buying the former Bank of America prime brokerage business.

However, another major finding of the survey is the explosion in the use of smaller brokerage firms, or so-called “mini-primes,” which offer various mixtures of services plus the opportunity to outsource others to major service provider. Shoreline Trading, for example, which offers clients the choice of clearing and custody at Credit Suisse, Fortis, J.P. Morgan or Goldman Sachs, and Gar Wood Securities, attracted more responses this year than some established prime brokerage firms.

Many relationships have been tarnished for good. Asked how likely they were to reappoint a prime broker where a relationship had ended, an average of one in four survey respondents was prepared to say “never.”


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