What Is a Prime Brokerage Agreement

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. A master brokerage agreement exists between two parties: the investment client and the financial institution providing the primary brokerage services. This article is mainly about brokering blue-chip stocks, as this is mainly what the JC knows. Those who want to know more about the Archegos case can check out this article, but here – and the sister article on top-notch synthetic brokerage could be a useful background report, although the Archegos thing and credit suisse`s MD&A are a pretty neat background report in itself. So far, we have considered several defensive trading strategies regarding EoDs. But we also need to look at the offensive provisions that a manager should include in their BPAs: a master brokerage contract is a contract between an investment bank and a large client, such as a hedge fund. Through this agreement, the bank offers special services to the client in exchange for its first-class brokerage fees.

In addition to its core lending business, Prime Brokers – affectionately referred to as PB in trading – offers the following services: A Prime Brokerage is a set of services offered by some major investment banks. These services support clients` activities in the financial market. 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. 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 hedge funds. This relationship includes the personal relationship, business terms and finally legal terms – which is most important when relationships break down. 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. With the quantity 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 prime broker`s financing costs are crucial to its viability, it`s worth seeing what the prime broker does in each of these cases. The minimum account size to open and maintain blue chip brokerage account services is $500,000 in equity, but it is unlikely that such an account will receive 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 in high demand 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 up to $200 million in equity to qualify for the best treatment. Prime brokers also often have an advisory arm that helps an emerging hedge fund take off: set it up, find offices, hire people, hire lawyers, recommend (cough) prime brokers, and make capital injections. Hedge funds are typical blue chip brokerage clients, although other large professional investors may also use this type of service.

Legally, there is a minimum requirement of $500,000 in equity to receive first-rate brokerage services. Almost all customers are much larger. It is common for clients to have equity of $50 million or more. There is a wide range of legal agreements (or relationships) that can exist with a PB. This varies depending on the products traded (e.g.B. cash shares vs synthetic shares). For the purposes of this article, we`ll focus on top-notch cash brokerage – in fact, the most common form of top-notch brokerage. The three pillars we`ll explain below apply more or less to other types of top-notch brokerage, but there are nuances we won`t cover here. 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 that has a PB to take complete control of the fund`s account.

PBs will seek to include many discretionary rights, so they will have multiple ways to default on the fund. In practice, a PB will rarely use this power, but a PB will usually have as many options as possible 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 in times of extreme stress in the market. There is no industry standard main brokerage agreement, so this is not so much an anatomy as a collection of resources on an amorphous topic. 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. In many cases, a master brokerage contract also includes operational support. Although hedge funds are among the busiest traders and can have a lot of money, they are often small in terms of staff. If they don`t have enough bodies to do the often significant amount of direct work needed to trade securities, they usually outsource them. Under the main brokerage contract, the client pays a fee. The amount depends on a number of factors, including: The majority of primary brokerage clients are large investors and institutions.

Asset managers and hedge funds often meet the qualifications, as do arbitrageurs and a variety of other professional investors. In the case of hedge funds, blue chip brokerage services are often considered important to the success of a fund. In this first part of this series, we`re going to lay the groundwork for understanding why negotiations are important 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. [1] An agreement between a clearing broker and a client in which the clearing broker handles first-class brokerage transactions. A traditional brokerage is the right choice for most. If you`re new to investing, consider investment brokers for beginners. These have everything you need to get started. What elements need to be negotiated in terms of financing? Representations of participatory budgeting. An AIFM should seek a number of assurances from the PB, including with respect to the regulatory status, power and power of the PB to enter into the agreement. Blue-chip brokerage services aim to facilitate the diversified and active trading operations of major financial institutions such as hedge funds….