Prime Brokerage

Prime brokerage is a bundled set of services that large financial institutions offer to major trading clients—most commonly hedge funds and other institutional investors. These services let clients outsource execution, financing, custody, and administrative tasks so they can focus on investment strategy.

Key services

Prime brokers typically provide a mix of:
* Securities lending (to support short selling)
* Margin and leverage financing
* Trade execution and clearing
* Custody of assets and settlement services
* Cash management and daily account statements
* Risk management and reporting
* Capital introduction (introducing funds to potential investors)
* Operational support (e.g., NAV calculation, back-office services)

Some prime brokers also offer concierge-style or facility services, such as office space access or bespoke operational solutions. Participation in optional services is negotiated per client.

How it works

Prime brokers act as a central counterparty and service hub for large, active trading clients. Core functions include:
* Acting as intermediary between clients and counterparties (banks, pension funds, other brokers)
* Providing financing so clients can increase leverage or borrow securities
* Requiring collateral on lending or financing arrangements to reduce counterparty risk
* Facilitating netting to offset multiple positions and simplify settlement obligations

Clients can choose which services to use; they are not required to take the full bundle.

Account requirements and typical providers

• Minimum account equity to open a prime brokerage relationship can be around $500,000, but that size usually won’t unlock significant benefits.
• Meaningful prime-brokerage economics and discounted trading fees commonly start at about $50 million in equity.
• The largest and most favorable arrangements are generally reserved for funds with hundreds of millions of dollars in assets.
• Major providers include large investment banks and financial institutions (e.g., J.P. Morgan, Goldman Sachs, Morgan Stanley, UBS, Bank of America, Citigroup).

Fees and revenue sources

Prime brokers earn from:
* Fixed fees for account services (e.g., reporting, custody)
* Transaction fees and execution commissions
* Interest and financing charges on margin and leverage
* Securities lending fees and spreads
* Success or placement fees for capital introduction in some cases

Fee levels vary widely based on client size, transaction volume, services used, and negotiated terms.

Prime brokerage agreement

A prime brokerage agreement documents the relationship, specifying:
* Services provided
* Fees and fee schedules
* Margin and collateral requirements
* Minimum account sizes and trading thresholds
* Termination and default provisions

Clients negotiate terms based on needs, risk profile, and scale.

Example

A newly launched hedge fund raises $75 million and outsources back-office and operational needs to a prime broker. The prime broker:
* Manages cash and calculates monthly NAV for a $20,000 monthly fee
* Provides securities lending at a lending charge (e.g., 5% on borrowed amounts)
* Offers capital introduction and charges a placement fee (e.g., 2% of invested amounts)

These combined services let the fund concentrate on portfolio management while the prime broker handles operations and financing.

Common questions

Q: How does a prime broker differ from a regular broker?
A: A broker executes trades for clients. A prime broker provides a broader suite of financing, custody, clearing, and operational services tailored to institutional clients.

Q: What is margin in prime brokerage?
A: Margin financing is when the prime broker lends cash to a client to buy securities. The broker’s exposure is to the client’s ability to meet margin obligations, and collateral and margin terms are set in advance.

Q: How much do prime brokers charge?
A: Fees vary by provider and client. Charges depend on transaction volume, services used, and the negotiated relationship terms.

Bottom line

Prime brokerage provides a one-stop set of operational, financing, and custodial services for large, active investors. By outsourcing execution, settlement, and financing, institutional clients can scale trading strategies and focus resources on performance, while prime brokers generate revenue through fee schedules, financing spreads, and lending activities.