Custody and Trade Settlements

One of the basic functions that a prime broker performs for a hedge fund is to act as a custodian for its assets and to settle its trades.  The custodian holds the fund's stocks, bonds, commodities, etc. in a separate account.   As a result of the Lehman bankruptcy, there have been discussions of how to safeguard these assets better.  Some funds were unable to retrieve the assets that were embroiled in the bankruptcy procedure.  Because of this risk, managers are having 3 or more prime brokers handle their funds.

The prime broker processes and settles the fund's trades with different counterparties.  Since the broker clears all the trades, it is able to give the fund manager centralized reporting.  The global brokers will be able to handle trades across different countries and products (such as equities, fixed income, commodities, foreign exchange, futures, options, warrants, credit default swaps, equity swaps and other over-the-counter derivatives).  It also handles corporate actions on securities.  These actions include:

• Mergers and spin-offs
• Tender offers
• Dividends and interest payments
• Calls on bonds
• Stock splits
• Annual meetings and proxy communications
• Accounting i.e. calculation of Net Asset Value (NAV)