Leading prime brokerages are preparing to hit clients with across-the-board increases in the cost of trading, which could dry up liquidity and cause niche global markets to shut down.
The brokerages – which execute trades and provide financing for the $2 trillion hedge fund industry – are facing new liquidity and capital requirements as a result of Basel III banking regulations. These are being brought in between now and 2018, with the first batch of rules to be enforced by the end of this year.
The Financial Times has spoken to top brokers including Goldman Sachs, Morgan Stanley, JPMorgan and Deutsche Bank, all of which confirmed they were preparing to price in increases to the cost of funding and pass them on to hedge fund clients in the coming months.
“We are having regular in-depth meetings with clients, and the common theme is the impact of the new regulatory regime on financing and on trading”, said Louis Lebedin, global co-head of prime brokerage at JPMorgan. “The Basel III rules recognise the importance of balance sheets, capital and funding and are forcing all firms to meet the same requirements.”
“Things that qualify as tier III [hard to value] assets or that can’t be re-lent in the secured market are likely to become more expensive to finance across the market”, said Barry Bausano, head of equities for the Americas at Deutsche Bank.
“Gone are the days when people weren’t held accountable for the amount of funding they draw down from their central treasury, gone are the days of free balance sheet. We have to justify the return on the balance sheet we use”, said Nick Roe, global head of prime finance at Citigroup.
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