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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.

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