The prime brokerage sector post Lehman and AIG’s crash has been under much scrutiny. Hedge fund managers have opted to diversify their portfolios and as a result new opportunities have arisen for banks wanting to offer PB services.
BNP Paribas one of Europe’s leading banks reignited its prime brokerage products after purchasing Bank Of America back in 2008.
BNP Paribas has confirmed it is ready to open its global prime brokerage unit for business, having spent the last 18 months preparing the division for entry into the increasingly competitive sector.
The French bank bought Bank of America’s equity prime brokerage business in October 2008, when it was predominantly a US prime broker for US clients. BNP Paribas spent the first year integrating the business with its existing prime broking division in Europe and since then has worked on rolling out a global service.
Sam Hocking, global head of prime brokerage sales at BNP Paribas, told Financial News: “When we came over from Bank of America the plan was to build a global prime brokerage business. The premise was to expand BNP’s financing business into a best in class global client facing prime brokerage business.”
BNP Paribas prime brokerage clients can now trade in non-US securities, receive non-US reporting and gain access to financing in non-US jurisdictions. The next goal is to be able to finance any global client in any jurisdiction, according to Hocking.
BNP Paribas has 350 employees dedicated to its prime brokerage business and plans to grow headcount in the US, Asia and Europe over the next year. It will initially look to win market share by positioning itself as a number two or three prime broker for hedge funds seeking to diversify their relationships.
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The bank will initially look to leverage relationships with some of the legacy clients of Bank of America and will later aim to set up a group to focus on startup managers in London and New York.
The market leaders in Europe are Morgan Stanley, Goldman Sachs, Credit Suisse and Deutsche Bank. Other banks such as JP Morgan, Bank of America Merrill Lynch and Barclays have aggressive plans to grow market share in Europe. BNP Paribas lies outside of trade magazine EuroHedge’s annual ranking of the 10 largest European prime brokers by total assets and number of mandates.
Hocking said that BNP’s prime brokerage push is both a bet on the future growth of hedge funds, as global industry assets hit all-time highs of $2.04 trillion, and an attempt to bring in revenues in other parts of the bank.
Hocking said: “Large hedge funds tend to give their top three prime brokers the lion’s share of their trading business. If you are one of these three relationships, for every dollar in revenues that prime brokerage brings in, it’s estimated that the bank will get an additional $2-3 of business from that client elsewhere.”
The fortunes of Nomura, which retreated from carrying out cash prime brokerage in Europe earlier this year after struggling to compete with its more established rivals, demonstrates the challenges faced by new entrants.
Basel III may also challenge banks’ commitment to prime brokerage as new regulatory requirements on bank liquidity and bank leverage may put balance sheets under pressure, leaving banks with less capital to spare for financing businesses. This may lead to consolidation within the space.
A prime brokerage client of BNP Paribas said: “BNP Paribas is one of few euro-funded banks that offer prime brokerage. It has a strong credit rating and it also offers good pan-European equities coverage.”
The prime brokerage sector will continue to develop as more and more participants use prime brokerage services. Industry estimates believe that since 2007 over 1200 firms are using prime brokers as their main counter-parties including hedge funds, retail aggregators, pension funds and asset managers. Smaller hedge funds can work with secondary prime brokers or mini prime brokers who have less collateral requirements. The need for credit has been put in question and this is going to be the major challenges banks need to address in order to ensure the product continues to evolve.