Banks Expand into Prime Brokerage

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Byline: Anuj Gangahar

Prime brokerage, once the preserve of only the richest investment banks, is rapidly becoming a main part of the product offering from a variety of institutions, including custodial lenders.BNP Paribas is the latest bank to launch a full-service prime brokerage operation. JP Morgan is also close to launching, while State Street, the US financial services group, has started a limited service for its existing hedge fund clients.

BNP Paribas aims to offer a full range of services to existing trading counterparts and new clients, as well as provide a capital introduction service.

However, some in the industry are unconvinced that these relatively late entrants to the prime brokerage business can compete with more established outfits.

One analyst says: "The right time to enter the prime brokerage business was 10 years ago. I am not sure that banks entering the business now are going to be able to build up enough clients to support a full-service business. They may be better advised to stick with a more limited offering. That said, if they throw enough money at the business, it may just be possible."

Frederique Barnier-Bouchet, global head of prime brokerage at BNP Paribas, says: "As a prime broker, you need to offer a capital introduction product. We have developed a database of our clients and prospects, and aim to offer a more personalised approach and target exactly the type of funds and strategy investors are looking for."

Over the past 18 months, the bank has developed its own system, which covers fixed income, equity and structured products. Commodities will be included by the end of this year. The bank approved the launch of a prime brokerage business in 2001 when market conditions were different.

Barnier-Bouchet says: "Although market conditions have evolved, the fundamentals have not changed. Hedge funds are a growing part of the market and to be a significant capital market player, you have to be active with hedge funds - which is difficult if you are not a prime broker."

BNP Paribas has 50 staff in its prime brokerage team, mainly in support functions.

Barnier-Bouchet expects this number to grow as the bank takes on more clients, particularly in development, sales and relationship management.

Despite the competition from new entrants, the prime brokerage business continues to be dominated by Goldman Sachs and Morgan Stanley, both of which have been investing heavily in the business for the past 15 years. Deutsche Bank, Credit Suisse First Boston (CSFB) and Bear Stearns form a second tier in the sector.

One analyst says: "When you look at it that way, it puts into context the size of the task facing firms that are only now launching their prime brokerage business. Hedge funds are very discerning customers and just as surely as investors look for a track record when investing with a hedge fund manager, so hedge fund managers look for a track record when appointing a prime broker."

The consensus in the industry is that newer prime brokers will have to focus their efforts on winning business from start-up hedge funds.

One established prime broker says: "I think these firms will have a good deal of trouble winning business from the biggest hedge funds with more than $1bn ([euro]910m) under management. …