Prime Brokerage Survey.pdf - Prime Brokerage Survey SURVEY...

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Prime Brokerage Survey
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46 Global Custodian | Hedge Funds 2015 globalcustodian.com 2 014 was a solid year for hedge funds continuing the steady recovery from the financial crisis. In the past that would have been enough to encourage continued growth by prime brokers to support new and existing funds. But these are not ordinary times. The regulatory juggernaut kicked off by the crisis is beginning to be made flesh, with short term consequences almost wholly negative for hedge funds and prime brokers alike. While the detailed rules have yet to be finalised in many key areas, the basic shape is now clear. As a result the world’s largest banks are beginning to adjust their activities to take account of capital ratios, leverage ratios and net stable funding requirements. Typically this process starts at the very top, and works its way through to different business units, including prime brokerage, deciding at each stage how much capital to allocate and how each unit needs to manage total leverage, deposit and funding requirements. Individual business units then have to decide how the overall approach impacts on specific client business relationships and in some cases hard choices have already had to be made. Regular evaluation of client relationships should be part of any business, and among many prime brokers the process is well established. In normal circumstances decisions to reduce commitments to individual clients are a confidential matter that is managed in such as way as to attract little or no publicity. Decisions are ‘mutually agreed’, adjustments to prices and availability are accommodated by iterative adjustment and an evolutionary process is completed with clients’ of the hedge funds concerned most likely unaware and certainly unaffected. However, it is clear that in the current climate, some providers at least have found it hard to maintain a cool exterior. The last twelve months have seen a growing number of rumours and stories of major prime brokers asking large numbers of clients to leave at relatively short notice. Similarly pricing and availability of credit, the willingness to accept deposits and sudden imposition of drastic increases in minimum revenue/fee levels are talked about by competitors and clients like. The facts of individual stories may be subject to interpretation and distortion by competitors. However, the number and consistency of information, as well as a body of anecdotal evidence, point clearly to the notion that something out of the ordinary is taking place. A reassessment of relationships within individual prime brokers and a reshuffling of clients among them are underway. Whether what has happened to date represents the bulk of any adjustment that is needed or is merely the precursor of more drastic changes still to come remains to be seen.
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