What Is a Prime Brokerage Services Agreement
The first step in any negotiation is to know what you want. Identify the products, funding needs and other services (e.g., trading tools such as an order management system, operations, reports, advice, introduction to the ceiling, research, etc.) that the fund`s strategy requires. However, the standard online brokerage account will not cut it for large customers. Large clients need a wide range of financial services, and that`s where a top-notch brokerage contract comes in. A primary brokerage contract is a contract between an investment bank and a large client, such as a hedge fund. Through this agreement, the bank provides special services to the client in exchange for its top-notch brokerage fees. Unless you`re running a hedge fund or any other type of high-volume securities trading business, it`s extremely unlikely you`ll need a top-notch brokerage contract. Even day traders who trade several times a day do not have this need, as buying and selling them is usually quite simple. Well, here`s the curve: none of the above favorable elements can be found in the main ABP. Instead, they are negotiated under a separate legal agreement called a term or closed commitment. With the quantity and depth of top-notch brokerage services, there aren`t many companies that can offer them. For the most part, this is the domain of the big investment banks.
Hedge funds are typical top-tier clients, although other large professional investors can also benefit from this type of service. Legally, there is a minimum requirement of $500,000 in equity to receive top-notch brokerage services. Almost all customers are much larger. It is common for clients to have $50 million or more in equity.  Please note that this article examines prime cash brokerage and not other types of prime brokerage such as prime fixed income brokerage, FX prime brokerage (or FX brokerage) or synthetic prime brokerage. While there are some similarities, the services provided and the relationship with the PB are different, as are the legal conditions and approach. Prime brokers, sometimes called prime dealers, are generally larger financial institutions that do business with other large institutions and hedge funds. In 2018, for example, Morgan Stanley says its primary brokerage unit serves as a partner to more than 800 hedge funds and institutional clients.
Although blue-chip brokerage offers a variety of services, a client is not required to participate in all of these services and may have services provided by other institutions at their discretion. A traditional brokerage is the right choice for most. If you`re new to investing, consider stock brokers for beginners. These have everything you need to get started. There are a variety of legal agreements (or relationships) that may exist with a PB. This varies depending on the products traded (e.g. spot versus synthetic stocks). For the purposes of this article, we will focus on blue-chip cash brokerage – in fact, the most common form of blue-chip brokerage. The three pillars we`ll explain below more or less apply to other top-notch types of brokerage, but there are nuances we won`t get into here. An agreement between a clearing broker and a client whereby the clearing broker clears first-class brokerage transactions. Unlike other joint trade agreements – such as the ISDA Framework Agreement – the industry has not developed a standard form of program-based approach.
Each brokerage firm has its own proprietary program-approach model with a variety of different formats and conditions, each requiring careful consideration and consideration. However, some core principles tend to be recurrent in all PBAs. Therefore, knowing these fundamentals allows a manager to better understand the framework of a PBA and to navigate its terms and conditions more easily. That`s right – not getting favorable terms in terms of financing and margin is consistent. Such adverse conditions may force a manager to reduce risk or transfer balances to another PB (if the manager has one). But these consequences pale in comparison to insolvency. In the event of late payment, PB has the option to liquidate all portfolio assets at its discretion and without notice. Even worse, most of a manager`s business agreements are likely to contain cross-default provisions, resulting in a cascade of cross-defaults in all other agreements. Under the main brokerage agreement, the client pays a fee.
The amount depends on a number of factors, which may include, but are not limited to: Understanding the liquidity profile of the fund`s portfolio and considering the type of funding term required by the strategy. Have a clear portfolio sample to present to PB, as well as a great story about you, the manager, including your investment philosophy and potential for the future success of your business. So far, we have considered several defensive trading strategies regarding EoD. But we also need to consider the aggressive provisions that a manager should include in its programmatic approaches: this series of articles looks at the prime brokerage agreement (“ABA”) and aims to provide hedge fund managers with a structured approach to their PB relationship – a way to better protect their interests and those of their investors. A primary brokerage contract exists between two parties: the investment client and the financial institution providing the primary brokerage services. An agreement between a prime broker and an execution broker under which the prime broker will provide prime brokerage services in accordance with the SEC`s lead brokerage no-action letter. The majority of prime brokerage clients are large investors and institutions. Asset managers and hedge funds often meet the qualifications, as do arbitrageurs and various other professional investors.
In the case of hedge funds, top-notch brokerage services are often seen as critical to a fund`s success. Termination without cause Termination without cause takes place in the ordinary course of business, without either party being contrary to the contract. Either party to the PBA may terminate the relationship. The fund should be able to terminate the relationship after notification to participatory budgeting, but the PB should be required to communicate this in advance. The timing of the PB announcement should coincide with the Fund`s timeline for the duration of the commitment/lock-up. If the fund has no term commitment/lock-up, a manager should aim for at least 30 days here. In addition, if possible (depending on the size and portfolio of the manager), a backup PB should be set up and active (or at least nearby). Maybe your trades will go so smoothly that you will create your own hedge fund or a large-scale trading operation.
In this case, you may need a prime brokerage contract. But until then, you shouldn`t have to worry about the details. A concierge service can also be offered. These may include risk management, capital injection, securities financing and cash financing. Some even go so far as to offer the possibility of subletting office space and providing access to other benefits related to the installation. As with more traditional offerings, participation in one of the concierge services is optional. A prime brokerage is a set of services offered by some large investment banks. These services support clients` activities in the financial market. Simply put, a PB provides a central location for trading many types of products and offers various services. The PB provides financing, clearing, settlement, execution, technology (via reporting and trading platforms), advisory services, capital introduction, middle and back-office support, etc. What elements need to be negotiated in terms of financing? A top-notch brokerage firm offers a range of services to qualified clients.
The assigned broker(s) may provide settlement agent services as well as financial leverage. Custody of assets can be offered as well as the daily preparation of account statements. Prime brokers offer a level of resources that many institutions may not be able to have in-house. Essentially, a top-notch brokerage service provides large institutions with a mechanism that allows them to outsource many of their investment activities and focus on investment objectives and strategies. The minimum account size for opening and receiving primary brokerage account services is $500,000 in equity, but it is unlikely that such an account will receive many benefits beyond what would be offered by discount brokers. For hedge funds or other institutional clients who get the kind of services that make a top-notch brokerage account attractive (especially the reduced fees for trading), an account size of $50 million in equity is a likely starting point. Nevertheless, these services are in high demand by customers and the best banks only accept customers who are most likely to be for them over time. For this reason, a hedge fund would likely need $200 million in equity to qualify for the best treatment.