The last couple of months have seen two global institutions step up their game in the prime brokerage arena – namely HSBC and JP Morgan.
The former launched in Europe at the end of last year, and this June decided to roll out its prime services unit in Hong Kong, in doing so making a raft of new hires across trading, sales and client relations. Laurence Denvir heads up client service and integration. Also in June, US behemoth JP Morgan launched its European prime brokerage business, having actually had prime brokerage capabilities since ’08 when it acquired Bear Stearns.
Traditional heavyweights Goldmans, Morgan Stanley and Credit Suisse will be watching closely as these two global giants enter the ring. And with counterparty risk high on fund managers’ minds, not to mention their investors, developing strategic partnerships with universal banks is gathering momentum. Both HSBC and JP Morgan are offering integrated prime services. That means not only supporting front-end trade execution and clearing, but also, crucially, custody of assets (for HSBC it also extends to fund administration).
“It’s absolutely crucial,” comments Chris Barrow (pictured), HSBC prime services’ global head of sales, on the integrated service. “We’ve built our prime services offering on top of our global custody platform, which is all within HSBC Bank Plc. Hedge fund managers are finding this works for them.” He cites HSBC’s ability as a custodian to offer segregation of client assets, its accounting expertise, strength of balance sheet and credit rating as key factors in growing the business.
“The attraction with our offering is that any assets not being used as collateral can be held in an unencumbered, segregated custody account protected under trust law. Where we differ from our peers is offering the protection of keeping client assets in one entity and not moving them out to other parts of the organisation or to third parties.”
Teresa Heitsenrether is head of EMEA prime brokerage at JP Morgan. Now that the business is up and running in Europe, she points out that the two immediate goals are to ensure that it is relevant to the bank’s existing clients, and also to establish new relationships in Europe and Asia, providing prime brokerage capabilities “to the same level of our international competitors”. “In terms of competition and how we further break into this space, the JP Morgan franchise has a lot to offer. Also, in today’s environment, the creditworthiness and capital strength of your counterparties is paramount. We can clearly demonstrate strength and stability through all kinds of markets,” says Heitsenrether.
The target is to have 10 to 15 European hedge fund clients on board by year-end. A conservative target and certainly one that Heitsenrether is bullish on: “There’s absolute commitment that we’re going to be a top global provider in the prime brokerage space. We intend to grow and establish a leadership position in Europe over time.”
Barrow explains that HSBC’s clients are a combination of existing hedge fund manager with custody accounts, and new clients. Over the last six months, prime services has won eight individual fund mandates with managers running multiple sub-funds and as Barrow explains: “We’ve been signing clients this year and have another 25 clients currently onboarding in London and Hong Kong over the coming weeks.”
Barrow adds that HSBC prime services is focusing on equity strategies in 2011, although support for fixed income products like CDS will be rolled next year.
JP Morgan is not a newcomer to prime services in the region. Its European futures and options, FX prime brokerage and OTC clearing businesses have a number of long-standing relationships with macro and fixed income funds. “My immediate remit in Europe is around growing our equity prime brokerage as well,” says Heitsenrether.
As well as investing a lot in technology to offer clients efficient margin trading, HSBC has been very transparent in its pricing, particularly with respect to custodial fees. Clients like to see these fees (often small basis points) “because it demonstrates to them and their investors that they have a safe custody arrangement in place with HSBC. We don’t tend to blend rates across financing and custody.”
HSBC, unsurprisingly, has enjoyed great success in Asia historically. Since the prime services business got underway in Hong Kong last month it has developed a pipeline of 14 clients. Barrow expects to see 15 clients on the platform by year-end. “It’s the same legal entity as in Europe, the same infrastructure. It was just a case of putting people on the ground and delivering the technology in the Asian time zone. We now have 30 people in Hong Kong in prime services, not to mention the already well-established Asian equity finance business,” says Barrow.
One key difference, perhaps, between HSBC and JP Morgan is the former’s decision not to develop a capital introduction team, preferring instead to leverage off the firm’s existing relationships. JP Morgan, on the other hand, has a robust capital introduction offering in Europe headed up by Kenny King. Helping hedge funds in this arena is an integral part of the service in Heitsenrether’s view.
“We have an established cap intro team in EMEA with access to JP Morgan’s extensive relationships with long only and pension fund investors. Funds are more attuned to the stability of investments and the calibre of money coming in, so tapping into those diverse sources is important.”
Although Heitsenrether agrees that fund managers’ acceptance of the multi-prime model probably plays into JP Morgan’s hands, she stresses one caveat: “The challenge for prime brokers is to make sure we look at each relationship through an holistic lens. You need to be strategic partners and most fund managers understand there needs to be a fair, equitable relationship.”
The key is balancing diversification with relevance.
She believes the ability to offer an integrated service that’s operationally efficient for managers and still meets investors’ needs with respect to safety of assets “is a very powerful value proposition”.
As for HSBC’s mid-term ambitions for prime services, Barrow concludes: “We aim to be top five in Asia, by size of assets, by the end of 2012 and top 10 in Europe over the same time frame.”
Heitsenrether adds that JP Morgan will look to Asia once its European franchise is firmly established. “A lot of what we developed for Europe was done with an eye toward leveraging in Asia. We certainly have plans to grow the team in Hong Kong.”