The Differences Between a Custodian & a Prime Broker

However, DTC does allow for the deposit of securities under different methods; https://www.xcritical.com/ these apply to specialized asset classes such as customer-registered custodial assets, restricted shares, private placements, and limited partnership interests. Just because a company is a custodian and has “trust” in their name doesn’t mean you should trust them. Helping oneself to customer funds and failing to disclose a breach constitute shameful behavior.

Q&A with BNP Paribas Prime Brokerage and Custody

Though BitGo was prime custody not affected in the breach, the company did custody assets for Fortress and the ambiguity around the situation compelled them to issue a statement. By June 2023, rumors began to circulate about the financial hole at Prime Trust. Crypto custodian BitGo agreed to acquire Prime Trust but backed away from the deal. Shortly thereafter, Prime Trust was placed into receivership and eventually filed for bankruptcy. Gain unlimited access to more than 250 productivity Templates, CFI’s full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more. BTC, ERC20, Altcoins, DeFi tokens, G10 currencies, money market instruments, and U.S. treasury securities.

Hedge funds moving more assets into prime custody accounts with active management

That is attractive, in the sense that it replaces Deutsche Bank Securities Inc. counterparty risk with Deutsche Bank AG counterparty risk. But the German bank reckons fund managers and their investors are bound to be less comfortable with any solution that offers asset segregation within the same banking group. “If a client is concerned about the viability of a financial institution, they tell us they do not want to be in another part of that same financial group and would rather hold the assets externally” says Byrne. But internal segregation is precisely the alternative that well capitalised universal banks such as HSBC, J.P. Morgan and SEB now offer.

We provide institutional Execution, Settlement and Custody Services

BNP Paribas Securities Services looks at the drivers behind this – together with some of the criteria which hedge funds should consider when selecting their custodians. Such companies generally have lower cost per transaction, because they do not have to pay outsiders for custody functions and, therefore, offer competitive commission rates to investors. Note that for most startup hedge fund, the prime broker typically acts as the custodian. However, the role of custodian and prime broker are often performed by separate service providers, often to mitigate risk. The US Marshals Service (USMS) has selected Coinbase Prime to provide custody and advanced trading services for its “Class 1” large-cap digital assets.

Custody-Only Trading: Meaning, Drawbacks, Example

Prime brokers like these offer prime brokerage services to large investment clients, such as hedge funds. In this article, we focus on the role of prime brokers and how large investment clients choose the right one. As a result of the partnership, institutional clients will be able to access both prime brokerage and custody services from a single, secure provider via Zodia Custody’s Interchange solution, with prime brokerage provided by Hidden Road. Interchange provides independent, effective safeguarding of digital assets, while also reducing the counterparty risk exposure for Hidden Road’s clients. This means that clients will retain full control of their assets, while ensuring greater protection through settlement obligations.

Amundi Metori Epsilon Global Trends Fund

Prime brokers often partner with risk management service providers, such as RiskMetrics Group, to provide their hedge fund clients with daily risk and performance analysis services. Our group prime services business stands for a state-of-the-art product delivery to our clients via an efficient and innovative one-stop-shop production. We provide our clients the entire securities services value chain starting with brokerage, handing over to safekeeping of assets, managing all related asset serving activities like corporate actions, income and tax management. In addition, we offer fund administration for asset managers for UCITS and AIF funds. It took the plunge to make serving hedge funds a main business unit through the acquisition of Bank of America’s prime brokerage operation in 2008.

Citco Monthly Hedge Fund Update

These could include mutual funds, market maker firms, proprietary trading desks, and inter-dealer brokers. Most prime brokers are large Wall-Street institutions that are generally not able to service a hedge fund until it reaches a substantial threshold of assets under management. However, mini-prime brokers or “introducing brokers” act as a liaison between a hedge fund and the large prime broker.

Underpinning the emerging global reach of the prime brokerage franchises is the ‘AA’ rated strength of the BNP Paribas balance sheet. This works like a battering ram for the investment bank’s foray into providing prime brokerage finance, global securities lending and capital introduction to a diverse group of 2,000-plus investors around the world. It also helps buttress the bank’s global reach as a custodian and administrator of hedge fund assets, an area where it has significant experience and is among the market leaders. “It’s easy to see why the addition of a trust-department-type custodian has appeal for hedge funds,” she says.

In fact, in building its prime brokerage business HSBC has chosen to use its creditworthiness and custody capabilities as the twin foundations. Though its ambitions have provoked a sceptical response from market-leading prime brokers, its model is playing well with potential clients. Business is growing and the bank is poised to launch a prime services unit in Asia to complement its existing operation in London. “Yes, all the eggs are in one basket and clients do have counterparty exposure to HSBC Bank PLC” explains Chris Barrow, global head of sales for HSBC’s prime services in London. “First and foremost, investors and hedge funds need to look at the counterparty they are dealing with and be happy with that counterparty from a credit perspective.

The products and services offered by Zodia Custody and its affiliates are exclusively available to institutional investors, including accredited or professional investors, in accordance with applicable law and regulatory requirements. These products and services are not intended for the general public or for retail investors. Notably, eight out of 10 spot Bitcoin exchange-traded funds (ETF) in the US are Coinbase Prime customers. Launched nearly three years ago, has become a preferred platform for institutions and large digital asset holders. As of March 31, 2024, Coinbase safeguarded $330 billion of assets and recorded $256 billion in institutional trading volume in Q1 2024. Clients are also privy to the prime broker’s private research services, thus enhancing and reducing the fund’s research costs.

Then there were the additional costs, which mounted quickly if a fund traded actively. “For actively traded portfolio securities, movements back and forth between a global custodian and a prime broker would have been expensive and have led to operational risk,” explains Davis. “Morgan Stanley used an existing national bank subsidiary to create a custody solution for unencumbered assets.

• We have been made aware of several scams which are currently targeting members of the public.
• Capital introduction is essentially the process of connecting hedge fund managers to potential investors in the form of the prime broker’s asset management and private banking clients.
• Tim Theriault, president of corporate and institutional services at Northern Trust, says strength of balance sheet, rating and capitalization are key concerns of clients looking for a custodian.
• Indeed, solutions of exactly that kind have come under critical scrutiny by the practitioners of the new profession of operational due diligence.
• With a custodian that adheres to high standards for efficiency and risk management, you can meet the challenges of investing in today’s evolving markets.
• The custodian, also known as custody provider, keeps possession of the assets, according to Pilotage.

An obvious alternative was to follow the example of the traditional investment management industry and appoint a creditworthy, third party bank with a large balance sheet to safe keep the cash and fully paid (or unencumbered) assets of the fund. In theory, a custodian bank—or what Americans still refer to as a trust bank—ostensibly held no customer assets on its balance sheet. In theory, trust or custody assets were entirely separate from the activities of the bank. Each customer had securities in the digital records of the bank earmarked as their own.

Coinbase was chosen after a competitive due diligence process that evaluated various solutions. The company’s strong track record and ability to securely provide institutional-grade crypto services at scale were key factors in the decision, added the article. The Global Investor Gate is RBI’s unified user interface for all securities services products. The app- and web-based solution with full API connectivity is being developed by applying the best engineering and product development practices. The independent agile development team is fully dedicated to customer-centricity and fast deliveries. We have partnered with some of the largest custody providers to allow our clients access to a custody solution unrivalled in its offering.

Against a backdrop of shifting regulation, rising allocation, and convergence across strategies, the strategic value that custodians can add is increasingly coming into focus. For hedge fund and liquid alternative managers, the right custodian can enable growth strategies via additional yield generation, cash optimisation, hedging, financing, and distribution benefits. Finally, Saulnier-Arrighi says custodians can assist hedge funds with managing their risk and volatility through the delivery of currency hedging tools. BNP Paribas Securities Services notably offers Passive Currency Overlay for portfolio hedging and share class hedging. Institutions will also enjoy added risk management assurances through Zodia Custody’s industry-leading dispute-handling wallet control structure.

Investors may have a hard time trusting such a small entity for the safekeeping of assets, however. A custodian, on the other hand, is usually a nationally recognized institution, with a long history and established brand name. Custodians are also closely monitored by federal as well as local authorities to avoid fraud, errors and insolvency. Capital Fund Law Group has authored numerous investment fund publications, including instructive eBooks, white papers, blog posts, and sample offering document excerpts with illustrative footnotes.

The relative size or success of prime brokerages can be measured in several ways. If a custodian is compromised, the level of assets at stake also tends to cause any possible recovery or remediation process to be complex and prolonged. In the case of bankruptcy, account holders are considered creditors, and they are at the mercy of the judicial system. Casa specializes in helping investors take self-custody of their assets to sidestep the risks of third-party custodians.