Shifting Priorities

Before buying any product or service, consumers will typically run through a list of key criteria. A car, for example, needs to be affordable, reliable, safe and easy to drive, but changing circumstances may alter the importance of those factors. New driving regulations might make speed controls more important, while a rise in road traffic accidents could shift the focus on to safety features.

Foreign exchange prime brokerage has been through a similar renaissance in recent years. The combined effects of post-crisis banking reforms and the fall-out from the Swiss National Bank (SNB) de-pegging of the Swiss franc in 2015 have driven major shifts in focus on the part of prime brokerage providers and their institutional clients.

One of the first considerations for clients should be the creditworthiness of the prime broker, as there is a significant range of entities offering the service, from the largest investment banks to smaller boutique providers. In the wake of the SNB decision, when many institutions lost money on the sudden one-way currency move, safety of funds has become ever more important. Firms now recognise that they need to scrutinise the balance sheet and capital base of their chosen counterparties to make sure they have the necessary resources to withstand future market stresses.

Credit quality follows close behind, as the provision of credit lies at the core of the prime brokerage business model. If a prime broker is dealing with a large number of trading platforms, liquidity providers and clients, it needs a strong and plentiful supply of credit. Before entering into a new relationship with a prime broker, clients need to be sure that credit will be available when they need it.