One of the unintended consequences of market regulation is that it has leveled the playing field. In what was once a fiercely competitive environment dominated by bank-owned prime brokers, in recent years a slew of new entrants has emerged, offering different service models for managers to consider.
Indeed, in early December, ING Capital Markets LLC were the latest to say that they were expanding into PB with the launch of a synthetic prime brokerage platform to provide global, cross-asset portfolio swap products.
"We offer the flexibility of a multi-asset portfolio swap which is operationally efficient, streamlined and provides additional collateral and portfolio margin benefits," said Michael Baudo, Regional Head of Financial Markets Americas and Global Head of Securities Finance. "We are excited to launch a platform that differentiates itself and adds value to clients while drawing upon the more than 20 years of experience our team has been providing securities finance solutions to the market."
Cost of balance sheet is now a forensic exercise for Tier 1 primes. Hedge funds can no longer assume that they will get what they ask for in terms of leverage and financing. This has caused a degree of recalibration, for both managers and primes, as they seek out the best course of action to remain viable and profitable.
Over at Societe Generale Prime Services (SGPS), Duncan Crawford, Global Head of Hedge Fund Sales, stresses the point that, in response to market regulation, "we are fully aware of all the balance sheet implications of everything we do. We know exactly how profitable we are.
"Our costs of doing business at Newedge was becoming prohibitive but they have come down since becoming a part of Societe Generale. The bank deleveraged during the financial crisis. Some are in a more difficult situation and still deleveraging but Societe Generale is very lean."
Societe Generale is somewhat unique in the sense that prior to acquiring Newedge, although it operated a small cash prime brokerage business it had a significant stock lending business, facing off as lenders to Newedge's competitors. This involved the same balance sheet usage as lending direct to hedge funds. As such, the bank is adapting to Basel III with no significant uptick in balance sheet allocation as it provides securities lending to hedge funds within SGPS. If anything, the bank is now making more money as a result.
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