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ing years , as the latest reforms look to end the reliance on internal models in the US for estimating risk and introduce standardised frameworks .
While there is no exact timeline on the final ruleset being published and implemented , banks are preparing now and certain prime brokers have become increasingly sensitive to strategies with more punitive RWA and capital treatment .
Additionally , in February , the Federal Reserve Board released four new hypothetical elements as a means to analyse different risks within the banking system . Two of these scenarios include two sets of market shocks which
observe the hypothetical failure of each bank ’ s five largest hedge fund exposures under unique market conditions . This analysis will bring to light the results of a hypothetical major market disruption and the implications of it .
Most recently , Bloomberg reported that the Bank of England is also reviewing lenders ’ practices within their prime brokerage business as part of a long-running review into their exposure to hedge funds and other non-banks .
The arrival on the radars of various regulators stems from the fallout of the collapse of Archegos Capital in 2021 , where its various prime brokers – of which there were many - were not fully aware of the size of the fund ' s positions with other banks , and as the Bank of International Settlements put it , they thereby underestimated its overall leverage and impact on the markets in which it was active .
The silver lining was a complete reassessment of client relationships within the prime businesses of the biggest players and a wake-up call which was spun as ‘ good ’.
However , the downside has been increased regulatory scrutiny .
“ We ’ ve seen many of our competitors adjust and ‘ revisit ’ both their counterparty credit and risk policies following past events in the marketplace ,” says Travers , though Clear Street had no involvement in the Archegos saga . “ We believe that a robust risk and credit policy coupled with a stringent KYC policy will be key to avoiding another market event specifically within the prime brokerage space .”
ABN Amro adds : “ The post-Archegos stabilisation trend is also evident with central clearing of OTC products , increased capital requirements and introduction of UMR . This has led the business scope for prime brokers to expand to full collateral management optimisation across multiple industry areas , with the largest benefit to UMR impacted clients . In addition , there is also interest in more efficient financing solutions , such as repo paired with custody .”
Of course , there are multiple other market structure developments and regulations for prime brokers to contend with from markets moving to reduced settlement cycles to new cyber security requirements . Ultimately , in 2024 , the headwinds should only be a footnote to the main story – and that is around an industry reaping the rewards of a patient approach through some frankly wild years post-Covid .
There was a phrase used throughout our outreach that the biggest are getting bigger – with regards to hedge funds – but that growth also relates to the entirety of the prime brokerage business . What this means is a likely increased investment and focus on these units from the largest players as this lucrative business begins to grow as an increasingly prominent part of each organisation . But they aren ’ t the only benefactors - it ’ s been a big year for primes of all shapes and sizes , and all those left in the market have lofty ambitions for the future .
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