Credit Suisse’ recent exit from its prime brokerage business might be symptomatic of a bigger problem, according to Brad Bailey, Head of Market Intelligence at Clear Street.
Earlier in November, the investment bank announced its plans to exit Prime Services (with the exception of Index Access and APAC Delta One), helping drive an expected capital reduction of about 25% (more than $3bn) from 2020 levels by 2022.
Following the announcement Credit Suisse has signed a referral agreement with BNP Paribas to support its Prime Services and Derivatives Clearing customers in their selection of alternative providers for such services, in order to ensure a smooth migration of their business.
Credit Suisse’s findings from its own investigation into the Archegos Capital Management collapse (which cost the Bank $5.5bn) pointed to fragmented data, improper risk controls, and antiquated technology for the losses, Bailey said.
“Credit Suisse made a business decision to exit prime. Perhaps deciding to exit was the easier path, rather than further investing into the business,” he said.
“The reality is Credit Suisse will not be alone,” Bailey said.
“I would not be surprised to see other players come and make this decision as they look holistically at prime: at the execution, the clearing, the settlement, the reporting, and all the changes that are required to meet the needs of today’s investors and keep pace with regulatory requirements,” he added.
He thinks that many banks have not made the significant investments into prime and are operating on antiquated technology stacks in the core parts of their prime businesses.
“This is a massive and understandably challenging problem for banks to tackle. There is no easy path to modernize existing prime technology stacks to meet the needs of modern finance,” commented Bailey.
According to Steve Sanders, EVP of Marketing and Product Development at Interactive Brokers, Credit Suisse is exiting the prime brokerage business because of financial reasons.
“Over the years, some banks have scaled back on their prime businesses to focus only on the largest of clients due to large capital requirements and a lack of automation,” he said.
“Interactive Brokers’ prime brokerage offering is fully automated, has focused on building automated risk control systems to prevent issues like Credit Suisse, and is happy to take hedge fund clients of any size,” he added.
There’s been other times where other primes have exited.
For example, in 2019, Deutsche Bank finalized a deal transferring its business with hedge fund clients to BNP Paribas.
However, a person familiar with the matter told Traders Magazine, that the business models of BNP Paribas, Deutsche Bank and Credit Suisse are very different.
“First of all, because the markets business at BNP Paribas is part of a very diversified universal bank, which gives BNPP space to finance institutional clients through Prime. Second, BNPP’s equities franchise is now very unique with a market-leading EQD business, a European leader in cash equity research and a Global Prime Finance and Electronic Equities platform.”
“If you have a strong prime business, you not only service hedge funds’ equities needs, they can also do credit, rates and foreign exchange trading with you. This halo effect is really key,” he said.
But if prime brokers are cutting back because they can’t manage the risk properly, how will increasing demand for prime services be met?
Bailey said that for the bigger banks, prime is just one small part of their overall business, but for a firm like Clear Street it’s their core mission.
“Banks reevaluating prime opens up the door for other types of players to come in and fill the needs investors are looking for,” he said. “Investors are also given more choice in the marketplace to find the prime and services that are best for them. More choices for clients will continue to spur innovation in prime as firms compete for their business.”
“I think we are going to see an increasing number of banks looking at the prime market and really thinking about whether or not they want to make the investments to continue to play in this space. While they are considering their options however, we will likely see more independent and fintech-driven competitors enter the market,” he concluded.