How does prime brokerage margin work?

What Is Margin in Prime Brokerage? Margin is when a prime broker lends money to a client so that they can purchase securities. It is also known as margin financing. The prime broker has no risk on the underlying positions, only on the ability of the client to make margin payments.

What is margin in prime brokerage?

The margin terms made available by the prime broker to the hedge fund will determine the maximum leverage (or borrowings) available. The factors typically considered by hedge funds in choosing a prime broker include price, access to hard-to-borrow securities, credit worthiness, and access to term lending.

How do prime brokers make money?

The prime brokerage makes money by charging a fee, such as a spread or premium on the loan from a commercial bank, in return for facilitating the transaction. Another core service provided by prime brokers is that of trade clearing and settlement.

How do prime brokers provide leverage?

The cost of leverage to hedge funds depends on the method used to obtain leverage. Prime brokers typically charge a spread over LIBOR to hedge fund clients who are borrowing to fund their long positions and brokers pay a spread below LIBOR for cash deposited by clients as collateral for short positions.

What is a prime brokerage agreement?

The prime broker agreement sets forth the obligations of each party, including the scope of the customer’s and the prime broker’s permissible activities, and the prime broker’s services, as well as termination events.

What is a prime broker dealer?

Prime Broker. A broker-dealer on an exchange who maintains records and provides brokering services, including leveraged transactions, for other broker-dealers, money managers, hedge funds, and other major investors that trade on the same exchange.

What is a FX Prime Broker?

FX prime brokerage allows clients to trade with whoever they want using their prime broker’s credit profile and infrastructure. Clients simply sign a single legal agreement with their FX prime broker, thus removing the need for multiple legal and credit documents with each of their trading parties. Trade clearing.

What is a broker margin?

Margin is the amount of money provided by customers to the brokers who have agreed to trade their securities. It may also be called a provision to absorb any probable loss. When a customer buys on margin the customer pays only part of the margin, the broker lends the remainder.