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Custodian takes on frontline role

Demand for prime brokers has never been so high, thanks to the proliferation of new hedge funds. Spurred on by this, State Street is the first custodian bank to offer prime brokerage. Will it succeed?

State Street is on the verge of becoming the first custodian bank to offer a full prime brokerage service, but is this market really the place for a custodian to be competing?

Existing prime brokers have been waiting with baited breath for some time to see what State Street is planning to do. But now, with the launch of its first prime brokerage client due later this year, most are unaware of the extent of State Street's plans. Contrary to what many think, its recent acquisition of fund administrator International Fund Services (IFS) is only a part of it; State Street plans to offer the full prime brokerage package for its US equity clients - Europe is soon to follow - under its broker/dealer umbrella, State Street Global Markets.

Goldman Sachs, one of the top two prime brokers along with Morgan Stanley, is concerned at the development. "The relationship between custodial banks and prime brokers is based on mutual dependence and on a healthy respect for the fact that each group is capable of marketing directly to the other group's customers," says Alex Ehrlich, co-head of European prime brokerage. "Custodians are the largest aggregators of lendable supplies of stocks, and prime brokers are the largest aggregators of demand for that supply."

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