Loading the player...

What is a 'Prime Brokerage'

A prime brokerage is a special group of services that many brokerages give to special clients. The services provided under prime brokering include securities lending, leveraged trade executions and cash management, among other things. Prime brokerage services are provided by most of the large brokers, such as Goldman Sachs, Paine Webber and Morgan Stanley.

BREAKING DOWN 'Prime Brokerage'

Hedge funds started the prime brokerage option. Hedge funds place large trades and need special attention from brokerages.

Prime brokerages, at times referred to as prime brokers, are generally larger financial institutions that have dealings with other large institutions and hedge funds. Though prime brokerages offer a large variety of services, a client is not required to take part in all of them and can have services performed by other institutions as it sees fit.

Prime Brokerage Services

A prime brokerage offers a set of services to qualifying clients. The assigned broker, or brokers, may provide settlement agent services along with financing for leverage. Custody of assets may be offered, as well as daily preparations of account statements. Prime brokers offer a level of resources many institutions may not be able to have in house. In essence, a prime brokerage service gives large institutions a mechanism allowing them to outsource many of their investment activities and shift focus onto investment goals and strategy.

Concierge-style services may also be offered. These can include risk management services, capital introduction, securities financing and cash financing. Some services even go as far as to offer the opportunity to sublease office space and provide access to other facility-based benefits. Just as with more traditional offerings, participation in any of the concierge services is optional.

In the cases of securities lending, collateral is often required by the prime brokerage. This allows it to minimize the risk it experiences as well as give it quicker access to funds if they are needed.

Qualifying Clients

The majority of prime brokerage clients are made of large-scale investors and institutions. Money managers and hedge funds often meet the qualifications, as well as arbitrageurs and a variety of other professional investors. In the case of hedge funds, prime brokerage services are often considered significant in determining a fund's success.

Two common types of clients include pension funds, a form of institutional investor, and commercial banks. These forms of investors often deal with a large amount of cash for investment but do not have the internal resources necessary to manage the investments on their own.

RELATED TERMS
  1. Brokerage Company

    A business whose main responsibility is to be an intermediary ...
  2. Brokerage Account

    An arrangement between an investor and a licensed brokerage firm ...
  3. Firm Order

    1. A market order to buy or sell a security for a brokerage's ...
  4. Brokerage Supervisor

    A brokerage company employee who appoints, trains and manages ...
  5. Approved List

    A list of pre-selected securities that are deemed fit for purchase ...
  6. Commission

    A service charge assessed by a broker or investment advisor in ...
Related Articles
  1. Personal Finance

    The Role of a Prime Broker

    Understand the role of a prime brokerage, and learn about the services investment banks provide for hedge funds while in the role of being a prime broker.
  2. Investing

    What's a Brokerage Account?

    A brokerage account is a contractual arrangement between an investor and a licensed securities broker or brokerage.
  3. Financial Advisor

    Understanding Brokerage Fees

    Agents charge brokerage fees for facilitating transactions between buyers and sellers.
  4. Trading

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  5. Investing

    Opening Your First Brokerage Account

    Learn what steps you should take before you open your first brokerage account.
  6. Retirement

    The Rise of 401(k) Brokerage Accounts

    Many 401(k) plans now allow participants to trade stocks and bonds by offering brokerage accounts inside the tax-deferred plan. Good idea or too risky?
  7. Investing

    Bank Failure: Will Your Assets Be Protected?

    The SIPC and FDIC insure against personal financial ruin when banks or brokerages go belly up.
  8. Personal Finance

    Explaining Prime Rate

    Prime rate is the interest rate banks charge their best (e.g. prime) customers.
  9. Investing

    Full-Service Brokerage Or DIY?

    Determine what you are getting for your fees and commissions and how to get your money's worth.
RELATED FAQS
  1. How can an investor profit from the increase in popularity of discount brokerages?

    Find out how investors benefit when brokerages compete with each other, and how discount brokerages are changing the market ... Read Answer >>
  2. Why are most brokerage firms owned by banks?

    Learn about the differences between investing with a bank-owned brokerage firm or with an independent broker. Get real answers ... Read Answer >>
  3. What is the difference between a national and a regional investment brokerage?

    Learn the differences between a national and a regional investment brokerage, and the advantages and disadvantages of doing ... Read Answer >>
Hot Definitions
  1. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  2. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  3. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  4. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  5. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
Trading Center