[ I N - D E P T H | P R I M E B R O K E R A G E ]
to service assets providing financing is correct , and that our cross- margin regimes are broad enough to adapt to client strategies ,” says Marchand .
Prime brokers also appear to be more willing to bring on increased hedge fund balances following the crisis . Firms including Goldman Sachs and JP Morgan saw their hedge fund balances boosted by increased trading activity from managers looking to capitalise – or limit their losses – from the volatility during the first quarter .
JP Morgan ’ s Cossey explains that the US bank ’ s prime brokerage strategy has not changed despite
the pandemic , with its sales teams utilising digital and virtual technologies to win new mandates .
“ We remain focused on delivering value and scale , with a client acquisition mindset and continuing to expand our client footprint . Our strategy hasn ’ t changed during this time , and we have either kept market share or grown it . There have been some mandates won entirely virtually , carried out by our sales and relationship management team through Zoom or Microsoft . It has been a surprise that the pipeline has been so active ,” Cossey says .
BNP Paribas also remains undeterred by the coronavirus as it accelerates its integration of Deutsche Bank ’ s prime brokerage and electronic execution business . The French bank has said its migration plan to bring Deutsche Bank ’ s hedge fund clients onto their prime brokerage platform , as well as its electronic execution technology , is ‘ on track ’ and has not been affected by staff working from home during the COVID- 19 pandemic .
How prime brokers approach pricing of financing and factor in gaining market share will also be vital in their post-COVID growth strategies . Over the past few years , pricing power has largely rested in the hands of hedge funds , who have used their influence to enact downward pricing on their prime brokers . In addition , some prime brokers have turned to pricing
“ We quickly worked through some operational obstacles pertaining to the infrastructure of the hedge fund community when there were meaningful margin calls that had to be met .”
JON COSSET , GLOBAL HEAD OF PRIME FINANCE , JP MORGAN
their services cheaply to gain new hedge fund balances .
Whereas some may assume prime brokers may look to increase the cost of their services off the back of the crisis , it is not that quite simple .
According to one prime brokerage expert , with clients deleveraging massively and balance sheets across the Street falling by up to 40 %, banks may turn to cheap pricing as a lever to make up for this .
That being said , prime brokers may look to revisit pricing of financing illiquid asset classes , including private equity , real estate , and emerging market debt .
“ Equity prime pricing remains very competitive and there is still some price compression for the right type of clients . As you get into more illiquid collateral , the pricing power has shifted back to the primes . There is a lot of shopping around , and the price is varying as much as 50 basis points , with different banks having different appetites and some are having no appetite at all any longer ,” adds Nomura ’ s Brech .
“ Primes were previously lending too much without understanding the assets they were lending against , maybe because they had priced it too cheaply . There is going to be some re-pricing so they can guarantee returns .”
While pricing could be used as an initial short-term solution to regain balances and win market share , the COVID-experience for all firms has shown the importance of relationship management , communication , and a robust infrastructure . Hedge funds will want their prime brokers to guarantee access to financing , as well as the wider prime wrapper such as trading and research .
Hedge funds may also be more prudent when selecting their partners , not just prime brokers but all of their third-party providers , with an emphasis on data .
“ We see hedge funds taking an ‘ as-a-service ’ perspective to their primes , their custodians , fund administrators , and outsourced trading providers . It boils down to whether a prime broker can provide their client immediate access to the data they need , can it be consumed via APIs , and can it meet the needs around what the market is calling for in terms of transparency . This prime-as- a-service model will only accelerate with the move to more agile working , more structured real-time data decisions , and more flexibility ,” concludes Bennett .
56 // TheTRADE // Fall 2020