I realized that there really isn't much information on prime brokerage on this site, even though it has been a significant source of revenue at bulge bracket banks under the S&T umbrella. I currently work in this industry (one of the big players GS/MS/JPM/DB) and am here to answer any question you have about prime brokerage. Silly or not, whatever question you have, shoot them my way.
prime brokerage services definition
Prime brokerage (PB for short) is a service provided by a registered broker-dealer that handles centralized custody, securities lending, financing, and margining, and regulatory reporting for both individual and institutional clients.
Put another way, in the client service functions of a broker-dealer, someone has to issue the margin calls, establish the clients' reporting and netting structure, resolve disputes, and keep their eyes open for regulatory issues (which include Reg T at the Federal Reserve Board level, Rule 4210 at the FINRA level, and whatever in-house custom requirements are set by your bank). That someone is your PB unit.
You can get another perspective on the role of PB below:
How Does a PB Desk Make Money?
The are several ways that a PB desk makes money. We discuss several below.
One of the ways a PB unit makes money is through "rehypothecation," a process that is done by your stock loan desk. Rehypothecation essentially lets the firm re-use client collateral for its own trading and borrowing purposes--allowing for more flexibility, and potential profit, for the firm. This can be a MAJOR source of income.
However, the most basic way to make money is financing client's positions (leverage). BBs can take the client's portfolio and raise cash from it (collateralized financing) at attractive rates, let's say some basis points over libor/fed funds/other reference rates and lend this balance out to HFs at a mark-up as HFs are less credible counterparties than investment grade rated banks. This represents part of the revenue. So PBs want large AUM clients that need massive leverage.
Finally, fees can also be collected for providing custody and clearing services.
Good Groups in Prime Brokerage and Exit Opportunities
In the Q&A below, one user inquired about what group within prime brokerage is considered to be the most analytical and to have the best exit opps.
The OP responded that origination sales gets paid really well. I think it's a great job if you have a talent for selling. You just have to get clients to sign with your PB and you own the relationships.
As a sales person you sell the products and services that the firm offers and if your client is a big contributor, you will make out well from a commission standpoint and you will build a strong network with the buy side.
The other groups that the OP recommended are trading groups (repo trading, sec lending, etc). It is market related and you get to take some risk. If you have a view that IBM will be shorted heavily by hedge funds starting 3 weeks from now, you can accumulate IBM inventories and hedge your market exposure by selling synthetic forward on IBM (long a put and short a call at same strike). This way, when every HF in the earth wants to borrow IBM in a few weeks, you have all these supplies and can lend it out at high rates and make bank.
The OP explained that product management is good if you like system design and info technology. When considering bad groups, the OP warned against client services which is the least analytical role since you will be mainly just tackling the daily problems and requests of clients.
Prime Brokerage Compensation
If you are a senior person (SVP/MD) within PB, you get paid well no matter what group you are in. However, on the junior level, your all-in compensation (base + bonus) might not be as high as your peers that are doing well on a traditional trading desk.
Bonuses depend largely on group that you sit in within PB. The trading, origination people are going to get paid on par with other areas of S&T, especially if the PB is a big market share taker. Other groups might make slightly less than the origination people as the other groups such as product management are not directly contributing to revenue.
Read More About Prime Brokerage on WSO
- What Is Prime Brokerage?
- Prime Brokerage Sales
- Prime Brokerage (Super Day)
- Prime Brokerage Stories: Expect No Favors
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