The challenges in prime finance
By EJ Liotta – The past several years have brought about rapid changes to the global banking industry. The post-credit crisis world has been defined by uncertainty and put pressure on revenues and operating margins. Combined with acute regulatory demands, this has created an unprecedented set of challenges for many firms. 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.
Larger, existing prime finance organisations also have an opportunity to gain market share. The challenges they face, however, are different from new entrants and are focused on simultaneously reducing cost and providing additional product depth. Many have spent massively in an attempt to crack the upper tiers of the industry, often meeting with mixed results and then ending up with expensive, bifurcated and hard to manage technology platforms.
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.
PrimeOne Solutions is the only technology firm in the world to provide a comprehensive package for facilitating the prime financing business. 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.
The key is to ensure that a solid regulatory foundation has been put in place. For example, business-wide swap consolidation is essential to ensure compliance with Dodd-Frank. Equally, prime services-specific issues, such as limited use of client positions for funding purposes and finding asset-liability mismatches must be covered.
PrimeOne Solutions technology forms the foundation of these services, providing many off-the-shelf tools to ensure proper compliance, whilst removing barriers to entry. Using a cloud-based technology model, PrimeOne Solutions’ clients are able to improve time-to-market, take advantage of feature modularisation, and the naturally superior economics of hosting.
EJ Liotta is global head of PrimeOne Solutions
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