04 October 2021
In our instant, digital world, trades can be executed within a matter of seconds. This speed hides the complexity of the process, with both prime broker and custodian services required to complete the transaction. While these services don’t always require different providers, they ensure that speedy trade execution occurs.
What are these services, how do they differ and why are they so important?
Prime broker services are the first port of call for hedge funds when they want to place a trade order. They may do this via the telephone or through accessing their account with the prime broker online. It’s the prime broker who will take responsibility for clearing the trade.
Alongside these duties, the prime broker will organise any financing required to leverage the trade. In essence, this means the prime broker will arrange for a hedge fund to borrow money to buy and sell financial assets.
Prime brokers will also take care of much of the administrative and regulatory work associated with trading. This includes submitting a report about the trading activity to the relevant tax authority. They will also provide their clients with end of year tax statements and may also offer a range of investment advice.
As the name suggests, the custodian ensures safe custody of the assets involved in trade execution. The name derives from the pre-digital era when printed stock certificates were printed and held in storage by custodian services. This storage is now mainly electronic, but it’s still the responsibility of institutions to ensure the funds are transferred in a safe and timely manner.
When a stock is bought or sold, it’s the role of custody services to move the digital entry representing the stock certificate to the buyer’s account and accept funds from the buyer to complete the transaction.
Custodian services are by and large more complex and involved than those of a prime broker. Custodian services need to offer very high levels of trust, competence and efficiency, to inspire confidence in the clients they work with.
Prime broker services tend to be smaller operations with fewer personnel, whereas custodians will be widely recognised institutions. They will usually have a long history and may be an established brand name. Because of the services they offer, custodians will usually be tightly regulated and monitored by financial authorities.
It’s possible for an institution to provide both prime broker and custody services. These can provide a more cost-effective solution for clients because everything is kept in-house. This means they can usually offer their services with highly competitive commission rates to their clients.
As well as providing in-house custody services, they may also offer custodian services to other prime brokers. Prime broker services that don’t offer custodian services will generally charge higher fees due to the need to pay for the service.
Global Investment Strategy offers prime brokerage and custody services to our growing list of international clients. Our dedicated trading desk is open across global trading hours, giving our clients unrivalled market access.
Our team at Global Investment Strategy has over a century of combined tier-1 financial institution experience, giving us the skills and depth of knowledge to add value to your investments.
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