04 October 2021
For trade execution to take place efficiently and for all parties to have confidence in an individual trade and the markets overall, it requires the services of several different providers. Market infrastructure has evolved over the decades to provide an increasingly efficient and reliable service. In the digital era, trades can happen within seconds.
Despite this speed, the processes involved are complex, requiring both prime brokerage and custodian services. These two services are frequently confused but are pretty different, fulfilling two separate roles. As a result, they’re often provided by various institutions, each with a different focus.
What exactly are they, and why are they so crucial to the trading process?
Custodian services play a vital role in ensuring trades take place and help build confidence and reliability in the trading process. They will usually be larger institutions than those that only provide prime broker services. In many instances, they will be established brand names with a long history, and their services will be tightly regulated and monitored by financial authorities.
Custodian services are responsible for the safe custody of client assets and ensure that those assets are transferred safely and on time. Because of this, they need to maintain high levels of trust with their clients.
In the past, it was the role of custodians to maintain safe custody of stock certificates. Now, these are primarily electronic, but the principle remains the same. When ownership of the stock changes, custodian services will change the ownership details on the digital entry.
Prime brokerage services are critical to hedge funds that want to place a trade order. They will contact their prime broker either online or via the telephone, who will take responsibility for ensuring the trade is cleared.
Another vital aspect of their work is enabling hedge funds to access the funding they need to leverage a trade, making it possible to buy and sell assets. They will also take care of much of the administrative work associated with trading and ensure that tax affairs are in order and regulatory compliance is assured.
They will also keep records that can be referred to in the event of a dispute. Prime brokerage services take care of much of the ‘nuts and bolts’ of the trading process, ensuring that trades efficiently take place, ironing out potential difficulties and ensuring proper records are maintained.
Crucially, prime brokerage services may also include investment advice from highly experienced financial professionals.
Frequently, prime brokerage and custodian services will be offered by the same institution. This enables the prime broker to provide competitive services to a broader range of clients. Those prime brokers who outsource custodial services have to include the cost of those services in their pricing model. As a result, they may concentrate on providing prime brokerage services to larger clients where they can offer highly tailored and personalised services.
At GIS HK, we provide combined custodial and prime brokerage services to a growing list of global clients.
Our highly experienced team helps traders achieve their goals with unrivalled, on-the-ground knowledge of Asia-Pacific markets.