Prime brokerage gets its wake-up call
A sign of too much risk and exposure in a frothy market or just two banks that didn’t have their risk management in order? Prime brokerage has become a profitable mainstay for several banks but, as Archegos shows us, it punishes the distracted
There are two schools of thought about the Archegos Capital Management situation and what it tells us about the curious world of prime brokerage.
One is that Archegos is just the start, the first of many chickens coming home to roost. This version holds that too many banks, starved of income by low interest rates and the slow death of cash equities, have committed too much capital to prime brokerage clients without the right risk management policies in place. They have simply replaced the risk they took with structured products a decade ago with another kind of blind-sided leverage, their vision impaired by a glut of total return swap exposures that disguise a client’s overall leverage because you can’t see what positions they hold with other brokers.