The "rise of custodian banks" - BNY Mellon
09 October 2011 New York
Image: Shutterstock
Hedge funds are turning to custodians for services as the financial industry faces dramatic shifts, says BNY Mellon's CEO of ABDS.
"With investment banks and fund managers in crisis, the universe of companies providing key services to hedge funds has dramatically shifted, and a door has opened," writes Brian Ruane, CEO of BNY Mellon's Alternative and Broker-Dealer Services (ABDS).
As a result of two distinct emerging models in the US and Europe, custodians will be playing a larger role in the world of hedge funds.
"Alternative investment managers are looking to custody banks as financial intermediaries who can deliver a seamless offering that will safeguard their clients’ assets and meet their needs in a changing market environment," writes Ruane. "This is in direct response to hedge funds that are increasingly seeking to diversify counterparty risk while continuing to deal directly with their prime brokers."
In the US, custodians provided assurances of safekeeping following the crash in 2008. As a result, services traditionally reserved for prime brokers, such as clearing, cash and collateral management, became components of a service partnership between prime brokers and custodians.
In Europe, hedge funds primarily use custodian banks to provide collateral management services on initial and variation margin but European-based hedge funds are increasingly showing interest in custody services for their unencumbered assets as well. Driven by the need for greater asset protection and control, hedge funds in Europe are pushing prime brokers toward service models similar to those found in the US.
"With investment banks and fund managers in crisis, the universe of companies providing key services to hedge funds has dramatically shifted, and a door has opened," writes Brian Ruane, CEO of BNY Mellon's Alternative and Broker-Dealer Services (ABDS).
As a result of two distinct emerging models in the US and Europe, custodians will be playing a larger role in the world of hedge funds.
"Alternative investment managers are looking to custody banks as financial intermediaries who can deliver a seamless offering that will safeguard their clients’ assets and meet their needs in a changing market environment," writes Ruane. "This is in direct response to hedge funds that are increasingly seeking to diversify counterparty risk while continuing to deal directly with their prime brokers."
In the US, custodians provided assurances of safekeeping following the crash in 2008. As a result, services traditionally reserved for prime brokers, such as clearing, cash and collateral management, became components of a service partnership between prime brokers and custodians.
In Europe, hedge funds primarily use custodian banks to provide collateral management services on initial and variation margin but European-based hedge funds are increasingly showing interest in custody services for their unencumbered assets as well. Driven by the need for greater asset protection and control, hedge funds in Europe are pushing prime brokers toward service models similar to those found in the US.
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