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“ That linkage creates one franchise sale to our most important clients and consequently , the wins and losses are magnified across all three products ,” says Credit Suisse ’ s Galietto . Furthermore , the competition within prime brokerage has been helped by the easing of the Basel III capital rules . Back in 2013 prime brokers began to start shedding clients to free up their balance sheet , but this has now calmed down . Many banks are now having a capital plan in place and have shifted resources to certain products that meet overall strategies . “ The prime brokerage landscape is the most competitive since 2007 . Everyone is focused on optimising revenues , and the stability of the prime platforms means for many , getting bigger is a net improvement in return metrics ,” explains Cossey . “ The industry isn ’ t constrained by any single constraint such as balance sheet as in 2013 , and are now in a better position to manage regulatory impositions and understand the impacts in their business across numerous binding constraints .” However , the position the top three US investment banks hold in the prime brokerage market is being challenged by other players . Credit Suisse , which at a time was once the third largest prime broker in the US , is making a number of moves to win clients after significantly scaling back the business . As have Barclays , BNP Paribas , Nomura , and - now to an extent - Deutsche Bank , which has recently voiced its commitment to the US prime brokerage market . According to Nomura ’ s Brech , the time for European and Asian banks to take on the US primes globally is fast approaching . “ The US domestic market has been over-brokered over a long period of time ,
“ Prime brokerage and financing has been a driving force for the industry ’ s equities wallet .”
BETTY GEE , HEAD OF PRIME SALES , AMERICAS , BARCLAYS
so the margins have gone to the lowest they have ever been ,” says Brech . “ From a balance sheet perspective , the US is one of the least efficient because the US stock lenders usually only take cash collateral which increases usage . It still remains an attractive business because of the potential scale , but having natural resources of usable and good internalisation rates are vital if you are going to hit firm target returns .”
Prime-savvy clients Subject discussions between prime brokers and hedge funds have largely evolved from matters that were previously taboo , such as fees and revenue targets , to one where both sides look to benefit their own businesses as a whole . Hedge funds are now a lot savvier when it comes to the prime brokers they select , splitting their mandates between the bulge bracket prime brokers and other emerging banks . Fees are becoming less and less a core selection choice for hedge funds , and rather wanting to partner with a broker that offers the most in the long-run . “ One of the fundamental changes in the industry is that clients are no longer simply looking for the cheapest price , rather that they want their balances to generate the firm target return so they get long term sustainability ,” adds Brech . “ Clients have become experts in how prime brokers generate revenues and demand transparency to make sure their balances are lucrative and will therefore be valued at the overall bank level .” In addition , with the level of sophistication growing rapidly when servicing large hedge funds , the level of awareness over efficiency is also increasing within these discussions , resulting in prime brokers looking at their own shop to see how they can improve efficiency ratings . “ Both sides are spending more time and dollars on technology to try to significantly increase the efficiency of financing . This effort has the potential to reduce the cost of financing for hedge funds , while increasing the return on financial resources deployed by prime brokerage businesses ,” says Galietto . There is a clear correlation between the changes within the hedge fund space and the growing importance of prime services for banks . The prime broker-hedge fund relationship is evolving beyond financing to one that includes electronic execution , derivatives clearing , securities lending and algorithmic trading solutions . As hedge funds clients become even more important to the big banks , and the evolution of electronic trading in the hedge fund space picks up , those primes that are able to invest heavily in technology may be successful in challenging the historic duopoly of Goldman Sachs and Morgan Stanley . JP Morgan may have the best shot of establishing a new industry hierarchy . Ultimately , prime brokers will become more transparent in their service offerings , which may categorised how deals are made going forward .
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