Definition: Prime brokerage refers to specialized services offered to wealthy investors, financial and non-financial institutions, hedge funds and private equity firms.
What Does Prime Brokerage Mean?
What is the definition of prime brokerage? Prime brokerage involves services such as securities lending, risk management, cash management, leverage buyouts, and more, which are offered to qualified customers, i.e. bulge bracket banks like Morgan Stanley or Goldman Sachs.
A brokerage firm may also provide leveraged financing and custodian services to individual investors. The financial crisis of 2008 led several brokerage firms to restructure. JP Morgan absorbed Bear Stearns; Barclays and Nomura acquired Lehman Brothers; Bank of America acquired Merrill Lynch. On the other hand, Goldman Sachs and Morgan Stanley remained untouched, although they had greater exposure to risk.
Let’s look at an example.
Company XYZ offers prime services to a range of institutional clients and large-scale investors, and it facilitates leveraged financing by undertaking the risk of secured, long position loans. In case the price of the underlying asset drops below the face value of the loan, the prime broker covers the long position.
In addition, Company XYZ offers securities lending services by acting as an intermediary between the institutional investors that lend the securities and the commercial banks that borrow the securities with money available for margin loans. Also, the company acts as a custodian of the assets of several hedge funds and has assets readily available that can be used as collateral, thereby allowing the prime broker to provide higher leveraging funds to a borrower than the funds they would receive from a traditional bank loan.
Qualified customers are provided with a sophisticated database of resources. In doing so, large financial institutions outsource their investment activities to the brokerage firm and focus on their investment strategy. Also, the company has built a prime brokerage platform to offer its custodian services.
Define Prime Brokerages: A prime brokerage means a set of financial services sold to specific high-end or wealthy clients.