What Is Prime Brokerage Agreement

A first brokerage is a group of bundled services that investment banks and other financial institutions offer to hedge funds and other large investment clients, who must be able to borrow securities or cash to be netting in order to obtain absolute returns. Services provided in the bonus brokerage business include, among other things, securities lending, debt-financed transactions and cash management. Premium brokerage services are provided by most of the largest financial services companies, including Goldman Sachs, UBS and Morgan Stanley, and the creation of units offering such services dates back to the 1980s. Unless you operate a hedge fund or any other type of high-volume securities trading operation, it is extremely unlikely that you will need the services of a first-class brokerage. Even day merchants who act several times a day don`t really have that need, because their buying and selling tend to be fairly easy without having to finish a lot of derivatives or margin financing gobs. But what is a first-class broker? I hear you say it. I`m glad you asked me that question. Here`s the answer. One of the central issues is the level of protection by asset separation and the speed at which assets can be returned to hedge funds.

Certain conditions for premium brokerage contracts are essential in this regard. For example, if the first broker is allowed to use companies in the group as a sub-custodian and then becomes insolvent, it can be very difficult for the insolvent prime broker to recover client assets if they are likely to be subject to their own insolvency proceedings (in a different jurisdiction than the first broker), and when they recover client assets, this can be very difficult for the insolvable principal broker. , clients` assets can be recovered from them, and when they recover the client`s assets, it can be very difficult for the insolvent prime broker to obtain assets from their clients and, if they recover client assets, he may not recover the full amount. The use of omnibus client accounts and the existence of security rules of interest, not only for the benefit of the first broker, but also subsidiaries of the first broker, can lead to similar deficits and delays in the event of performance problems. In addition, some premium brokers offer additional “value-added” services that may include some or all of the following aspects: This of course raises the question — if I`m just a person who likes to buy and sell shares, what kind of services should I use? These proposed regulatory changes are an encouraging sign of regulators` ability to respond to perceived weaknesses in UK insolvency legislation, while the expected structural changes in the UK`s “premium brokerage” model are another example of innovation and responsiveness to the demands of clients taken for granted by investment banks.

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