'Prime Brokerage' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
A prime brokerage refers to a particular category of different financial services which a number of brokerages provide to their important clients. Services they deliver under this umbrella cover a number of different types. Among these are leveraged trade orders, loaning of securities, and cash management assistance. The majority of the bigger brokerages offer such prime broker services. This includes Goldman Sachs, Morgan Stanley, and Paine Webber.
The demand for such prime brokerage services originally came from the hedge funds. These special investment pools often place enormous trades. Because of this fact, they require particular attention from the major brokerages. These prime brokerages are also called prime brokers sometimes. They are usually comprised of enormous financial institutions. They tend to have business transactions with similarly large financial institutions as well as the hedge funds.
Prime brokers and their services are not mutually exclusive. While these financial services broker companies provide a wide range of such services, the clients do not have to participate in all or even most of them. The large clients have the choice to receive some of their financial services at other institutions that best suite their needs.
There are many such prime brokerage services the broker dealer may deliver to its best clientele. Whichever brokers are assigned to these important accounts will be expected to offer services as settling agent and gratuitous financing for leveraged trades. They could provide assets custody and even everyday account statement preparation. These prime brokers have the advantage of enjoying substantial and varied resources that smaller to medium-sized financial and brokerage institutions simply can not match within their own operations. This means that the prime brokers deliver a means for many of the bigger and more important financial institutions to “outsource” a range and host of their administrative investment activities so that they can instead concentrate their best efforts on strategy and on their investment goals and returns.
As an example, there may even be concierge types of services offered by the prime broker. There are a wide range of such highly specialized offerings the broker might include in an effort to keep their largest, most important clients satisfied. Among these are cash financing, securities financing, capital introduction, and even risk management services. There are also services that go above and beyond what would be expected of a typical broker. These could include the ability to sublease space within their offices and to obtain free access to other benefits based within their facilities. These are non- traditional services, and participation in them is completely voluntary for any client.
Some of these services require the hedge fund or other important client to post collateral. This is especially the case where brokerage securities are lent out to the customer. In this way, the prime brokerage is able to reduce its risk it takes on and also to obtain faster recourse to funds should they be required.
The truth is that the overwhelming majority of such clients of the prime brokerage will be comprised of bigger financial institutions, funds like hedge funds, and bigger private investors. It is true that hedge funds and money managers are some of the most important clients which attain the minimum qualifications to participate. Others who might meet the threshold for participation in the program include a range of professional investors and those who engage in arbitrage. Hedge funds know all too well that the level of these prime broker services will often play a substantial part in the success or failure of their fund.
Among the more common kinds of clientele that participate in and attain the standards for prime broker services are commercial banks and pension funds. Both of these groups will typically handle enormous quantities of money which they must invest. They also have in common that they lack the in-house resources to adequately invest and maintain such large dollar investments by themselves.