11 December 2012

Hedgeweek: The challenges in prime finance

Organisations are facing significant obstacles to generating proprietary trading revenue and are now focusing as intensely as ever on their client franchises. With its focus on hedge fund financing and service, prime finance is a major pillar of any client-centred banking organisation.

Prime finance is capable of driving many facets of global investment banking including rates, order-flow and structured finance. Because of the long-term nature of prime finance relationships, it can help set a strategic tone across a banking organisation. Recently, much of the hedge fund servicing world has been dominated by a handful of firms. This has impaired competitiveness and adversely impacted the industry.

The post-crisis world has presented opportunities for new entrants to generate new revenue streams and introduce competitive forces, ultimately benefiting the global hedge fund community. Hedge funds’ continuing requirement for diversification and the long-term nature of the hedge fund/bank relationship make entrance into prime finance particularly compelling.

While firms understand the benefits of expanding or entering into prime finance, the one major challenge faced by all participants is technology. New participants who wish to enter the space must build industrial-grade systems.

PrimeOne Solutions provides three core products that cover swap, cash prime brokerage and securities lending. The most basic features (i.e. trade capture, margin and reporting) are required just to enter the business, while advanced features (i.e. re-hypothecation, arranged finance, book optimisation) are needed for larger participants seeking to expand their product offering and/or drive P&L.

Although organisations face new challenges and opportunities, they must also comply with an increasingly complex, evolving global regulatory apparatus. Many regulations have now been entered into law and been interpreted by regulatory bodies, yet for many others the interpretation process has just begun.

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