What Are Prime Brokerage Agreements

15 avril 2021 - 2 minutes read

The first-class brokerage landscape has changed dramatically since the bankruptcy of Lehman Brothers in September 2008. Hedge funds that benefited from marginal financing from Lehman Brothers were unable to withdraw their guarantees when Lehman filed insolvency protection in the United Kingdom under Chapter 11 due to the lack of asset protection rules (such as 15c3 in the United States). This is one of the many factors that led to a massive reduction in debt on the capital markets during the 2007-2008 financial crisis. Stress tests include the execution of a number of scenarios that identify theoretical gains or losses for each position due to adverse market events. In almost all cases, you will want a traditional stockbroker, most likely known as discounter (the definition of discount brokerage is a bit loose; in fact, it means a broker who charges a modest fee for trading and offers a limited number of ancillary services). If you are new to securities trading, you should consider a brokerage more suited to beginners. At the end of the day, a first-class brokerage offers a set of services that support their clients` activities in the financial market. The minimum size of the account to open and obtain premium brokerage account services is $500,000 in equity, but such an account is unlikely to receive many benefits beyond what would be offered by discount brokers. For hedge funds or other institutional clients, in order to obtain the type of services that are worth having a first-rate brokerage account (including reduced trading fees), $50 million of equity is a likely starting point. Nevertheless, these services are highly sought after by customers and the best banks only accept the customers they are most likely to benefit from over time.

For this reason, a hedge fund would probably have to have up to $200 million of equity to qualify for the best treatment. If the near-bankruptcy of Bear Stearns was a wake-up call on the first broker`s credit risk, the collapse of Lehman Brothers in bankruptcy was probably a direct blow to the hull.