[ I N - D E P T H | P R I M E B R O K E R A G E ]
What appeared evident was the bleak comparisons with the 2008 global financial crisis now appear unfounded . March madness differed from 2008 , because there were no liquidity issues such as those seen with the Lehman collapse and other industry defaults . In addition , the prime brokers appeared to have learnt lessons from ‘ 08 and had built up sufficient capital reserves to weather the storm , largely due to post-crisis regulations .
“ The leverage in the system was less because the banks were not struggling at the same time . The post-Basel world has worked and delivered a robust infrastructure that allows the market to survive an idiosyncratic stress for a comfortable time ,” adds Cossey .
As hedge funds and prime brokers take the necessary steps on their road to recovery , firms will begin to collectively take lessons from their experience during the crisis and how it can shape future relationships .
One of the first lessons is how to keep track of margin calls when asset values are in constant fluctuation .
Prime brokers could face new pressures to demonstrate enhanced transparency over their margin frameworks , as well an increase in focus on real-time and intraday margin pricing . In addition , prime brokers may also have to deploy tools that will enable them to monitor who they are providing funding to and whether it is being used to finance illiquid assets .
“ The big impact the crisis has had is on the amount of financing available for non-investment grade credit which had evaporated . The big managers can still get it , but mid-tier and smaller firms are suffering because there is less appetite from lenders for that credit . Primes have learnt you have to monitor
the illiquid assets on your book and that the ratio to liquid assets is the right one ,” says Nomura ’ s Brech .
The crisis also proved to be one of the strongest tests for prime brokers ’ relationship management . One prime brokerage executive commented , “ Our relationship management was tested more in the past six months than it ever has been .”
The industry has never faced a situation where both prime brokers and their clients faced fragmentation of personnel and fragmentation of visibility and information flows . Going forward , prime brokers will look back on how they managed their communications with hedge funds and the value in providing continuous transparency on information flows and how clients absorb it .
Growth strategies As normality slowly begins to return and the industry looks to move forward , prime brokers will once again revisit their growth strategies . Over the past few years , banks have tended to focus on those funds that play to their core strengths , and the crisis may buttress this as primes aim to compete on product lines .
“ The crisis brings risk management practices and processes into the spotlight across the board . It is an opportunity for people to take a step back when they look at their models and to carry out an analysis of what worked and what needs to happen to make sure we are insulated for future shocks .”
JOHN DUBLAC , EMEA HEAD OF PRIME SERVICES SALES AND PRIME DERIVATIVES SERVICES , CREDIT SUISSE
“ We could see a big asset rotation coming , moving from equities to relative value fixed income and credit , and offering the necessary offsets and to provide custody and financing to clients who want to engage in those strategies . A lot of roles are being posted from those sectors for the prime ’ s risk team ,” says Capco ’ s Bennett .
The asset class rotation among hedge funds could encourage prime brokers to invest significantly in specialising in servicing credit and multi-asset strategies , as well as creating an infrastructure that can service the entire trade lifecycle . “ We are seeing more demand for a multi-asset prime wrapper , and we have to ensure our infrastructure continues to be the best , our ability
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