High Line Advisors LLC

management ideas for banks and broker-dealers

The Future of Prime Brokerage

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HLA has published an article defining prime brokerage as a center of secured funding and client service for banks and broker-dealers. A PDF is available here.

Article at a Glance

The recent financial crisis exposed structural vulnerabilities at many banks and broker-dealers. Several of these firms failed or nearly folded as a result. Prime brokerage was at the center of the turmoil, as loans to customers and the use of their cash were discovered to be hard-wired to firms’ own balance sheets and stock performance. Reaction to the crisis has already redistributed market share considerably: established firms have lost ground to well-positioned newcomers now that clients, seeking to separate the custody of their assets from the banks that lend them cash and stock, are distributing business among a wider group of lenders and service providers.

Prime brokerage has a dual nature. It not only provides products and services directly to clients, but also has financing skills that any bank needs for its own purposes. As a client-facing business, there is a great deal at stake: a 10-12% market share can generate between $1 and $2 billion in revenue, which suggests room for eight to ten significant players. But for the banks themselves, the savings in funding efficiency, risk management, operations, and technology may be considerably greater.

The future success of the bank rests on fundamental change: redefining its prime brokerage operation from a stand-alone product to the center of client service and secured funding across the bank. To remain competitive, a firm should be able to aggregate the activity of its customers across all of the firm’s products. More critically, the firm must have a robust funding mechanism for the collateral on its balance sheet. Lessons taken from the financial crisis will ensure that a firm’s internal structure can withstand future adverse market conditions and continuing demands from regulators, clients, and competitors.

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Written by highlineadvisors

July 24, 2010 at 7:38 am

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