What Is a Prime Brokerage Agreement

A master brokerage contract is a contract between an investment bank and a large client, such as . B a hedge fund. Through this agreement, the bank provides special services to the client in exchange for its main brokerage fees. However, the standard online brokerage account will not cut it for large clients. Large clients need a wide range of financial services, and this is where a master brokerage contract comes in. A blue chip brokerage is a group of services that investment banks and other financial institutions offer to hedge funds and other large investment clients who need to be able to borrow securities or cash to engage in clearing in order to generate absolute returns. Services provided under Prime Brokering include securities lending, execution of leveraged transactions and cash management. Blue-chip brokerage services are offered by most of the largest financial services firms, including Goldman Sachs, UBS and Morgan Stanley, and the creation of entities offering such services dates back to the 1980s. So far, we have considered several defensive trading strategies regarding EoDs. But we also need to consider the offensive provisions that a manager should include in their BPAs: with the amount 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. In each of these four transactions, the prime broker finances an asset and then receives the asset in one form or another. Since the cost of financing the prime broker is crucial to its viability, it`s worth seeing what the prime broker does in each of these cases. If you don`t have a hedge fund or any other type of high-volume trading, it`s extremely unlikely that you`ll need a master brokerage contract. Even day traders who trade several times a day do not have this need, because buying and selling them is usually quite simple. Top-notch brokerage is a financing business. That`s the key: lending money to clients so they can make investments. If all goes well, the client retains all the profits and losses of his investments, but pays the interest of the PB and repays the capital. The client lets the PB take care of the assets so they can monetize them, reducing their cost of providing financing in the first place. This article is mainly about brokering blue-chip stocks, as this is mainly what the JC knows. Those who want to learn more about the Archegos case can check out this article, but here – and the sister article on synthetic top-notch brokerage – might be a useful context, although, to be honest, the Archegos thing and Credit Suisse`s MD&A are a pretty neat background in itself. Well, here`s the curve ball: None of the above favorable elements are found even in the main PBA.

Rather, they are negotiated under a separate legal agreement called a term commitment or lock-in. An agreement between a primary broker and an execution broker under which the prime broker provides first-class brokerage services in accordance with the SEC`s primary brokerage no-action letter. The top-notch brokerage relationship is the cornerstone of most hedge funds` success. The principal broker (“PB”) acts as a financier, clearing and settlement agent, custodian, advisor and counterparty for the execution of transactions. In good times, PB can allow a manager to generate excellent returns, but in bad times (p.B, market downturns, stress events), PB can seal a manager`s fate. A strong relationship between a manager and the PB is paramount to the success of the hedge fund. This relationship includes the personal relationship, the terms and conditions, and finally the legal terms – which is most important when relationships break down. Termination for cause occurs when a manager (or its fund) is wrong under the terms of the ABP. The PB has the right to terminate the PBA if an EoD occurs. The EoDs set out in the ABP are the arsenal available to a PB to take full control of the fund`s account. PBs will seek to include many discretionary rights so that they have several options to default on the fund.

In practice, a PB will rarely use this power, but a PB will usually want to have as many options available in case the PB loses confidence in the manager or otherwise wants to exit a deal. EoDs are triggered when something has fundamentally gone wrong with a fund or during periods of extreme market stress. 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 offer many benefits beyond what would be offered by discount brokers. For hedge funds or other institutional clients to get the type of services that make a top-notch brokerage account interesting (especially the reduced fees for trading), an account size of $50 million in shares is a likely starting point. Nevertheless, these services are highly sought after by customers and the best banks only accept customers who are most likely to benefit from them over time. For this reason, a hedge fund would likely need to have up to $200 million in equity to qualify for the best treatment. Okay, suppose: Wikipedia says the term and concept goes back to New York broker Furman Selz, who offered a centralized service to asset managers in the seventies, with the idea of centralizing your back-office functions and trading flow in one place – a “premium” broker, we assume. But that`s a guess.

Nowadays, large hedge funds have several main brokers (Archegos had seven!!), so the adjective has lost some of its seal of approval. Top-notch brokers, sometimes referred to as prime brokers, are usually large financial institutions that deal with other large institutions and hedge funds. In 2018, for example, Morgan Stanley claims that its main brokerage unit serves as a partner to more than 800 hedge funds and institutional clients. Although Prime Brokerage offers a variety of services, a client is not required to participate in all of them and may have services provided by other institutions as they see fit. Understand the liquidity profile of the fund portfolio and determine the type of funding period required by the strategy. Have an example of a clear portfolio ready to be presented to the PB, as well as a great story about you, the manager, including your investment philosophy and your company`s potential for future success. The most important players in the main brokerage game are well-known names in the financial world. Here are six major financiers offering top-notch brokerage services: Termination without giving reasons Termination without giving reasons occurs in the normal course of business without either party violating the agreement. Any party to the ABP may terminate the relationship. The fund should be able to terminate the relationship after notifying the PB, but the PB should be required to give notice.

The timing of the DB`s notification should coincide with the time available to the fund in the commitment/freeze term. If the fund does not have a term commitment/block, a manager should try to get at least 30 days here. By the way, if possible (depending on the size and portfolio of the manager), a backup PB should be set up and active (or at least about to be ready). When a manager`s main PB draws margin loans, how do you improve your financing costs? By taking the shares you hold in your pb business (i.e. your clients` custodial assets, where they buy the shares directly – this is called “first-class spot brokerage” – or the shares you buy to hedge the stock derivatives you write to your clients, where they only enter into economic exposure to the shares as part of a swap and do not buy them directly – this is called “synthetic first-order brokerage” – and in both cases, these convert the shares into cash or cash-like instruments that allow you to repay what you borrowed from your own treasury department. [7] If the PB insists on including this clause and the manager is a smaller PB client, then the manager should offer triggers related to real events (p.B. Decline in net asset value, change of key person, change of investment manager) – and push to make it a termination event and not an EoD. A termination event gives PBs the right to terminate and liquidate assets, but it would not be considered an EoD, which could lead to a cross-default with other agreements (again, it would be important to check the wording in the other agreements). Maybe your trades will go so well that you will create your own hedge fund or a large-scale trading operation. In this case, you may need a main brokerage contract. But until then, you shouldn`t have to worry about the details.

In this first part of this series, we will lay the groundwork for the importance of negotiations and how a manager should approach them. We will then look at the three most important aspects – the “Three Pillars” – to ensure the stability of a manager`s PB relationship: funding, margin and termination. .

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