New Basis for the Hedge Fund / Prime Broker Relationship

Implementing the Right IT Infrastructure
by Axel Pierron, June 29, 2011
Industry Trends
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

A study by Celent and sponsored by Broadridge looks at the changes in the hedge fund / prime broker relationship and how this is fostering an evolution of the IT infrastructure of the prime broker.

In this report, New Basis for the Hedge Fund / Prime Broker Relationship, Celent analyzes the main trends changing the relationship. Then we detail how these changes should foster an evolution of the IT infrastructure of the prime brokers to facilitate providing value-added services to create a competitive dif- ferentiator. The financial crisis has changed risk behavior and risk tolerance within the capital markets industry. The bankruptcy of Lehman Brothers, leaving US$65 billion of hedge fund assets frozen, has pushed hedge funds to reconsider their relationship with the leading prime brokers. The multi-prime broker model that was slowly being adopted before 2007 has gained momentum and is now considered best practice within the industry.

Adoption of the multi-prime model has put a burden on funds, especially for data aggregation, which can be delivered by prime brokers with the right technology in place. The platform should be required to pro- duce unified reports from disparate structures and formats provided by different brokers, and deliver a uni- fied view of positions, trades, and balances.

In addition, as hedge funds increasingly implement multi-asset strategy, they expect reporting and position keeping across asset classes and often the ability to offer cross-margining as well. “The market is still dominated by single asset solutions, but the movement is clearly toward a multi-asset prime brokerage platform supporting clients’ expansion into new asset classes. Complete cross-product post-trade processing is where the industry needs to go to,” says Axel Pierron, SVP at Celent and author of the report. Multi-asset prime brokerage platforms allow the prime broker to increase its value proposition. By covering a wider spectrum of the assets traded by its customers, the prime broker will not only provide a “one stop shop” but also increase its ability to manage collateral requirements and risk exposures for its customers.

“Prime brokers’ customers are expecting them to carry real time processing and statuses, intraday busi- ness controls, and real time settlement and position status. This is obviously challenging in a multi-asset and multi-market environment.” adds Pierron. “Additional tools are needed in the risk management context to accurately compute the portfolio’s exposure and other risk measures. Therefore, the platform should not be limited to providing a consolidated view of positions and integrated reporting. “The concern about coun- terparty risk has not disappeared, but the leading prime brokers seem to be recovering market share due to superior balance sheet and level of sophistication. The drive that benefited the mini-prime providers has clearly slowed down. However, the positions are not set in stone. With fierce competition among providers in this space, there is a clear window of opportunity for financial institutions.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is part of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America (Boston)
Erica Ferguson
eferguson@celent.com
Tel.: +1 617 262 8225

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)208 870 7875

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81.3.3500.3023

Table of Contents

 

Executive Summary

3

Introduction

5

Building a New Prime Brokerage Relationship

7

 

Adoption of the Multi-Prime Model

7

 

Implementation of the Multi-Asset Trading and Multi-Market Strategy

9

 

Requirements for Greater Transparency and Reporting Capabilities

11

Leveraging IT Infrastructure to Answer New Market Demand

13

 

The Prime Brokerage Platforms in the Broker-Dealer IT Ecosystem

13

 

Implementing the Right Level of Segregation Between PB and Broker-Dealer Business

16

 

Multi-Asset Offering May Require Multiple Platforms

17

 

Reporting: Real Time Update of Transaction Status

18

 

Consolidation of Data for Client Portfolio

18

 

Regional Connectivity: Multiple CCPs and CSDs

21

 

Buy Vs. Build

21

Conclusion

24

Leveraging Celent’s Expertise

26

 

Support for Financial Institutions

26

 

Support for Vendors

26

About Broadridge

28

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