[ I N - D E P T H
|
C O V E R
S T O R Y ]
Global Investment Bank League Table FY17
Global Revenue
(USD Billion)
Equities =1 3 =1
Prime Services =2 =2 1
The following tiering applies:
Rank 1-3
Rank 4-6
Rank 7-9
In addition, financing, much like clear-
ing and settlement, is increasingly being
seen as a commoditised function among
prime brokers. As a result, banks have had
to think more laterally about how prime
brokerage can bring the hedge fund closer
through value-added services.
“Prime brings the client relationship for
the firm together and allows you to think
about that client more laterally across
products and regions. When you are
offering balance sheet you need to think
about how you can use it to enhance the
client’s footprint with, and maximise the
return for the firm. For the client prime is
a commodity business to a certain extent
so it is about the identifying the unique
value a firm can offer and using the prime
wallet to enhance the relationship and
access to limited resources,” explains
Dougal Brech, global head of prime
finance, Nomura.
MiFID II impacts
While the onset of Europe’s MiFID II
has had a clear impact on the equities de-
partments at the all of the big banks, it is
having its own effect on prime brokerage.
The unbundling rules meant prime
brokers would have to disaggregate their
service in terms of the fees they charge.
This means prime brokerage charges to
hedge funds will be itemised and manag-
ers will have greater transparency over
their service provider fees.
The rules were intended to open up
competition, providing hedge funds with
greater information about the fees charged
for certain prime brokerage services and
spread out their providers. However, the
intended impact is having quite the oppo-
site effect, with prime brokerage concen-
trated among the biggest players.
“In a post-MiFID II world where
institutional wallets are unbundled for
research and execution, it’s observed that
clients are increasingly concentrating
30
Global Custodian
Rank 10-12
Source: Coalition
volumes with the few providers where
they can aggregate everything into one,”
says JP Morgan’s Cossey.
“We are seeing those wallets concen-
trating with the full-service providers
that also offer post-trade services. The
big prime brokers have seen the biggest
benefits, and the smaller brokers are now
focused on this strategy as they want the
same holistic revenue stream.
“The more MiFID II becomes en-
trenched in equities divisions, the more
important prime services are becoming.
Prime will soon become the heart in the
middle of the equities wheel, with all of
the other trading products around it.”
The extra transparency requirements
MiFID II has enforced on the industry is
also having a noticeable effect on prime
brokerage operations.
Barclays’ Gee believes a more transparent
prime brokerage offering will resonate
with clients, with new technologies and
“The US domestic market has
been over-brokered over a
long period of time, so the
margins have gone to the
lowest they have ever been.”
DOUGAL BRECH, GLOBAL HEAD OF
PRIME FINANCE, NOMURA
‘best execution’ policies helping to create
deeper client mandates.
“We’re focused on building partnerships
with our clients. One of the key principles
behind this is the idea that transparency
will lead to better and stronger client
relationships. The industry is moving
towards best execution within financing,”
adds Gee.
“You are now seeing more prime bro-
kers, hedge funds and securities stock
lenders building out their technological
The Hedge Fund Annual 2018
capabilities, moving from iterative, manu-
al, ad hoc processes to real-time processes
with improved precision and the ability
to optimise financing decisions based on
commercial attributes. We are investing
in this shift toward transparency and best
execution, and which we think will help
us create deeper and stronger relation-
ships with our clients.”
A break in the duopoly
With the importance of prime services
increasing and banks investing signif-
icant amounts to propel the business,
what does this mean for the competitive
landscape?
Historically, the prime brokerage
market has been a duopoly, dominated
by Goldman Sachs and Morgan Stanley.
Since the financial crisis however, the
popular narrative has been that this du-
opoly has been disbanded, replaced by a
new order of half a dozen or so providers
and a growing breed of mini primes and
prime-of-prime brokers.
In reality, however, the two banks still
have a significant lead over the rest of
Wall Street. But that lead is closing. In
Coalition’s Global Investment Bank
League Table for 2017, JP Morgan is now
joint second with Goldman in prime
services, and potentially establishing a
‘triopoly’.
Hedge funds have diversified the types of
prime brokers they use, and have already
increased the number of prime brokers
they partner with. Nevertheless, brand
remains important, and hedge funds of all
sizes are keen as ever to ensure they are
partnered with a tier one bank.
As equities departments at the top banks
continue to link execution with prime
services, the landscape is more competi-
tive than ever. With hedge funds dramat-
ically increasing in size, the competition
to win these clients for all aspects of the
equities franchise is more intense.