How a prime brokerage agreement works
A prime brokerage agreement is between two parties: the investment client and the financial institution offering the prime brokerage services.
Hedge funds are typical prime brokerage clients, although other large professional investors can also use this type of service. Legally, there’s a minimum requirement of $500,000 in equity to get prime brokerage services. Almost all clients are much larger. It’s common for clients to have $50 million or more in equity.
As part of the prime brokerage agreement, the client pays fees. The amount depends on a number of factors, which can include but are not limited to:
- Total number of services
- Transaction volume
- Amount of money borrowed for margin finance
- Number of securities borrowed for short trading
With the amount and depth of prime brokerage services, there aren’t a lot of companies that can provide them. For the most part, it’s the domain of big investment banks.
The most high-profile players in the prime brokerage game are familiar names in the world of finance. Here are six big financiers that offer prime brokerage services:
- Goldman Sachs
- Bank of America Merrill Lynch
- J.P. Morgan
- Morgan Stanley
- Charles Schwab
Do you need a prime brokerage agreement?
Unless you run a hedge fund or some other type of high-volume securities trading operation, it’s extremely unlikely you require a prime brokerage agreement. Even day traders who transact several times daily don’t have this need, since their buying and selling tends to be fairly straightforward.
A traditional brokerage is the right choice for most. If you’re new to investing, consider stock brokers for beginners. These have everything you need to get started.
Perhaps your trades will go so well that you’ll set up your own hedge fund or large-scale trading operation. In that case, you might very well need a prime brokerage agreement. But until then, you shouldn’t need to worry about the details.
View more information: https://www.fool.com/the-ascent/buying-stocks/prime-brokerage-agreement/