Prime brokers offer hedge funds custody services so that clients can trade through smaller brokers and spread orders across multiple execution brokers, then give up to a main clearing prime broker to maintain execution anonymity. Brokers give up trades so that their underlying clients can spread orders across different dealers to reduce market movement.
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Prime Brokerage Custody Services
Custody is the safekeeping and administration of a hedge fund or investment manager’s financial assets. A prime broker providing custody services holds securities such as equities and fixed-income investments on the client’s behalf, while providing asset servicing, reporting and security.
Global custody allows funds investing across different countries and markets to manage thstese assets through a central relationship. For example, a prime broker can provide US and international custody, including global coverage for equities and fixed income. In the UK, international custody arrangements may also operate under the CASS framework, which sets rules around how regulated firms safeguard client money and assets.
What is clearing in prime brokerage?
Clearing is the process that takes place between executing a trade and finally settling it. Once a hedge fund buys or sells a security, the clearing process confirms the transaction, calculates what each party owes and ensures the securities and cash are transferred correctly.
Prime brokers can provide this infrastructure alongside execution, financing and custody, helping funds consolidate their trading operations.
Prime brokers, for example, can offer US self-clearing capabilities as well as multiple clearing arrangements and correspondent clearing for broker-dealers and financial institutions. An integrated prime brokerage relationship can therefore coordinate execution, financing, clearing, settlement and custody rather than the fund managing each separately.
What are give-ups in prime brokerage?
A give-up allows a hedge fund to execute a trade with one broker but have that trade transferred or “given up” to another broker for clearing and settlement.
This can be useful because investment managers may want to execute through several brokers to access better liquidity, pricing or specialist execution while consolidating their positions with their prime broker.
The executing broker handles the trade, while the designated clearing or prime broker subsequently accepts it and incorporates it into the client’s account. This helps funds separate where they execute trades from where they clear, finance and custody them, providing greater flexibility when working with multiple brokers.