I want to understand the reasons for using a prime brokerage? From my understanding you are able to use that bank's credit line in order to trade through, say, a direct access broker. What benefits come from using a PB and what are the typical requirements in order to get a PB agreement? Thanks.
you get access to credit for equity/fixed income (used for often on fixed income side for leverage in higher multiples) however w/ so many big players reducing risk (e.g. financing to all but their best customers like paulson) financing is either unavailable period or prohibitively expensive. an individual trader does NOT need a pb relationship. anything you want to do can be done w/ a direct access broker like ib unless you're doing something really esoteric or otc (if you're trading cds you'll need an isda for ex.). the reqs can be all over the map for a few million for the smaller players or mini primes that use jpm as custody or min 50m for gs/ms. your costs will be a lot higher w/ pb's too. they are in the biz to make money and if you are looking for the lowest rates prepare to be disappointed. my advice: stick w/ direct access broker. just b/c some big hedge fund has a pb (or multiple!) doesn't mean you need them.
In addition to what has already been said, with a prime broker you can have multiple execution brokers. For example, you may execute trades with 5 different brokers, but all trades are then aggregated for clearing/margining at a single entity (prime broker).
PB´s adore to give you credit. Thereafter, their prop division is taking a look at your positioning - thus being able to stop you better out. Best example: Amaranth Advisors LLC was an American investment adviser managing multi-strategy hedge fund founded by Nicholas Maounis and headquartered in Greenwich, Connecticut. The firm had up to $9 billion in assets under management and collapsed in September 2006 after losing in excess of $5 billion on natural gas futures.[1] The firms failure was one of the largest known trading losses and hedge fund collapses in history. The fund had up to $9 billion under management and reports indicated their losses may have exceeded 65 percent of their investment.[4] Amaranth transferred its energy portfolio to a third party consisting of Citadel LLC and JPMorgan Chase.[5] On September 29, 2006, Amaranth's founder sent a letter to fund investors notifying them of the fund's suspension and on October 1, 2006, Amaranth hired the Fortress Investment Group to liquidate its assets.
Any brokerage firm that takes custody of your assets is a prime broker. They all provide Custody, Financing, Securities Lending, some type of reporting and some type of execution service. BTW, IB is a Prime Broker.
thanks for the info guys one more question .. is there any difference between FX Prime Brokerage and other asset classes in regards to credit .. or are all the asset classes basically looked upon the same?
I'm sorry - but do you have evidence to support that Amaranth was killed by its PB taking prop trades against? Or are you talking out of your ass? It was brought down because of a huge trade by one of its traders that was the result of really bad risk control. To Wit: "On January 22, 2010, a Federal Energy Regulatory Commission administrative law judge ruled that Hunter violated the Commission's Anti-Manipulation Rule. Judge Carmen Cintron found that "Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts. His trading was specifically designed to lower the NYMEX price in order to benefit his swap positions on other exchanges." "