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What Is a Prime Brokerage Agreement?

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A prime brokerage agreement is a contract between an investment bank and a large client, such as a hedge fund. Through this agreement, the bank provides special services to the client in exchange for its prime brokerage fees.

This type of deal isn't available to everyday investors, but it also isn't necessary for that type of client. Most investors have everything they need with one of the best online stock brokers.

The standard online brokerage account won't cut it for sizable clients, though. Larger clients need a wide spectrum of financial services, and that's where a prime brokerage agreement comes in.

What is a prime brokerage?

A prime brokerage is a package of services offered by some major investment banks. These services support client activities in the financial market.

Services offered by a prime brokerage can include:

  • Custody of assets (holding the client's securities for safekeeping)
  • Cash and securities lending
  • Financial reporting
  • Capital introductions (meetings with investors)
  • Risk management consulting

In many cases, a prime brokerage agreement also includes operational support. Although hedge funds are some of the busiest traders and can have substantial money under management, they're often small in terms of personnel. If they don’t have enough bodies to do the often great amount of direct work required to trade securities, they usually outsource it.

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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
  • Citigroup
  • 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.

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