JP Morgan recently launched Prime Services in Europe. Why?
JP Morgan acquired Bear Stearns in 2008, and the capabilities we acquired at the time made us a well-respected and established prime brokerage unit in the US. However, the firm is committed to being a leader globally and serving our clients internationally. To that end, we made significant investments to launch a full prime brokerage offering this year in Europe for our international client base, leveraging and expanding on our already dominant footprint in the US and unparalleled financial strength. Through this platform, our international clients benefit from an integrated multi-asset class platform across execution, financing, clearing and asset servicing, as well as prime custody and margin solutions.
How have clients reacted to the launch?
The interest and response from our clients has been very favourable, even prior to the official launch in June, and we have a significant pipeline of committed mandates we are in the process of on-boarding. The strength of our credit standing provides an additional layer of safety to our clients, which has been the driver behind the increased interest in the recent months. Whether our clients are based in Europe or simply operating in the region, our aim is to deliver the high level of service that they have come to expect from JP Morgan.
What differentiates you?
Our prime brokerage business serves as a major channel to access the vast capabilities and global resources of JP Morgan – from leading investment bank execution, to advisory services and thought leadership in research. Our capital and balance sheet strength uniquely positions us to meet our clients’ financing needs, allowing our clients to grow and manage their business with the safety and stability of a proven partner.
We are also the only major international prime broker providing services using a UK Bank entity regulated by, and subject to, the rules of the UK Financial Services Authority (FSA). Our client asset protection structure conforms to the requirements of the UK FSA Client Asset Source Book (CASS) regime, which governs the safety and soundness of client assets.
Having custody services integrated with our prime brokerage platform also gives us a unique advantage.
How has the prime brokerage industry changed over the past few years?
The landscape has become much more competitive and the playing field is more level. Over the past few years, uncertainty has created a flight to quality with hedge funds adopting a multi-prime model. Instead of just having one prime brokerage partner, our clients have diversified their exposures by having more than one provider. Now, rather than two dominant prime brokers, there are four or five with another five or six smaller ones behind them.
Hedge funds are also under pressure from their investors, as well as regulators, to provide greater transparency around governance and more details related to how they report performance. The move to central clearing for over-the-counter derivatives has placed more emphasis on the clearing and settlement. That in turn has increased the need for prime brokers to be more transparent and disciplined on operational, risk management and compliance structures.
Banks are being weighed down by regulatory pressures, capital constraints and market uncertainty. How will this impact the prime brokerage business?
There are certainly a lot of headwinds. The increase in capital requirements will impact both prime brokers and our clients as liquidity and term financing will reflect the pressure on banks’ funding costs. We are also seeing decrease in leverage in the market as hedge fund managers reduce exposures in light of market and political uncertainty.
However, JP Morgan has always remained focused on capital strength and maintaining a fortress balance sheet: we have assets of $2.3 trillion and a Basel I Tier 1 common ratio of 9.9%, which is an estimated 7.7% Basel III Tier 1 common ratio. This capital strength allowed us to invest in new opportunities through the cycle and commit the right resources at the right time to develop a leading global prime brokerage business.
How is regulation affecting the Prime Brokerage industry?
In the past few years, we have seen the impact of the credit crisis and the ever changing regulatory landscape affecting both our clients and the way our business is structured. Uncertainties surrounding the debt crisis, evolving regulatory framework, and differences in local regulations make it particularly challenging for prime brokers operating in Europe. However, we have managed to build an international prime brokerage platform which focuses on protecting our clients within the new regulatory regime while allowing them greater flexibility for their business. In addition, with the regulatory trend towards centralised clearing of over-the-counter derivatives, we are putting a huge effort into educating our clients and working with regulators & industry bodies on defining the structures and improving the safety of the derivatives clearing model.
What is most important to clients when markets are challenging, as they are today?
In today’s environment, the creditworthiness and capital strength of your counterparties is paramount. We have demonstrated strength and stability through all kinds of markets - and our fortress balance sheet makes us a reliable funding partner in today’s challenging markets, which is critical for our clients’ operations. Clients also want to know that their assets are safe and protected. We believe the most important thing we can do is to stand by our clients and help them navigate through uncertainties by offering world-class advisory services. From capital introduction and strategic consulting to industry and regulatory advisory, we act as a leading execution partner and credit counterparty.
In general, prime brokers have tightened the conditions under which they provide leverage funds. Is this also the case for JP Morgan and how does this translate in practice (in addition to guarantees required collateral?)
JP Morgan continuously focuses upon upholding strong operational and risk controls and is dedicated to maintaining best-in-class risk management teams and technology. As such, our disciplined approach to capital and liquidity management has maintained the same robust and prudent standards towards risk management and lending we had prior to the financial crisis.
The Prime Brokerage business offers a robust house margin schematic that is both risk- and rules- based, which adjusts dynamically to changing risk characteristics in client portfolios. This approach provides transparency and ensures the appropriate level of capital efficiency and leverage to our clients. That makes both quantitative and qualitative sense for JP Morgan and our clients.
