Asset security underpins prime services solution


23 Mar 2012
Cian Burke, Co-Head of HSBC Securities Services; Paul Hamill, Global Head of Prime Services

The search for alpha has long been a global one. More and more, it is taking hedge fund managers to unexpected places. While the growth credentials of Brazil, Russia, India or China are well recognised, many of the fastest growing economies are in the frontier, rather than emerging, category.

A study produced by HSBC's Senior Global Economist, Karen Ward, on 11 January 2012, titled 'The World in 2050 – From the Top 30 to the Top 100', highlighted 26 fast growth countries expected to generate annual growth of 5 per cent or more over the next four decades. In addition to the likes of the Philippines and Malaysia, they included three central Asian 'stans', Egypt and Jordan. Five states in sub-Saharan Africa also featured on the list.

In economic terms, the world is shifting. Economic power is steadily beginning to move from west to east and north to south. Increasingly close ties between Asia, the Middle East, southern Africa and Latin America are expected to drive a rising proportion of trade and capital flows.

Efficient access to these markets through cash equities or, more often, tailored swaps and established market access products is likely to be make or break for certain strategies. The key for hedge funds is to find an end-to-end provider that can deliver the required market access within a prime services structure that offers maximum asset security, yet still retains financing flexibility. Combining our top-rated research analysis of nearly 1,600 companies and our extensive corporate access coverage with our growing prime brokerage business is proving a compelling proposition across the equity-based hedge fund world.

At HSBC, we have developed a uniquely structured prime services solution that is built out of our global custody platform, thereby providing fuller segregation of assets and protection under trust law. Integrated with Prime Swap, our synthetic securities platform, and our global markets operations, it currently delivers synthetic or cash equity execution throughout global markets, all supported by consolidated reporting.

The initial prompt was client demand for a custody-driven service from a top-rated name with a broad geographical footprint in the wake of the Bear Stearns and Lehman problems. Then, as now, the strength of HSBC's balance sheet and stability of funding is widely acknowledged. Today, HSBC retains the highest credit ratings of any leading global bank.

Our global custody operations are among the largest in the world. Part of HSBC Securities Services, which combines global coverage with local market expertise across the full range of securities services, we currently service $5.2 trillion of assets within a custody network that spans 88 markets, 40 of them serviced by HSBC entities.

Asset safety comes first:

At HSBC Prime Services, our standard client offering is two segregated accounts (charged and custody) on our global custody platform. Where clients need financing, either for their cash or derivatives transactions, assets are moved into a charged account as collateral – but still within custody. Clients can choose to control that movement themselves or leave us to automate it. And they can determine the order in which different classes of assets are moved. Simple, transparent and operationally efficient.

Many hedge funds use a combination of prime brokers and independent third-party custodians (or special purpose vehicles set up by their prime brokers) to achieve a similar outcome for their unencumbered assets. But to do so they have to enter into multiple legal and service level agreements often with separate entities. Their assets may be moved into different parts of the organisation, frequently increasing operational risk and reducing working efficiencies, where the balance sheet is not as robust.

At HSBC, they deal with just one counterparty – HSBC Bank plc – and enter into a single suite of market-standard legal agreements, thereby minimising their administrative and legal costs. As importantly, they know they can count on the strength of the bank's own risk management culture throughout.

Cost control with optimum visibility

Clients get a choice of financing options, giving them flexibility and control over their costs. We regularly put our own balance sheet at their disposal. The bank's ability to self-finance on a sustainable basis means we are in a position to offer competitive funding rates. To reduce their borrowing costs, clients can opt to transfer title to some of their assets to HSBC for rehypothecation. This is only done with client consent and can be controlled via our market-standard documentation. Clients receive fully transparent reporting across both charged and custody accounts, including any rehypothecated securities, on a T+1 basis, giving them a clear view of where their assets are.

The HSBC Prime Services platform is aimed initially at equity long/short, market neutral, event-driven and relative value strategies. It will be extended to other assets classes, including fixed income in the near future. To deliver comprehensive securities borrowing, lending and trading services that hedge funds need, HSBC Prime Services currently affords integrated access to our listed derivatives and FX, equity finance and Delta One platforms – together with our sales, trading and execution capabilities worldwide. HSBC Bank plc remains the counterparty throughout.

This report must be read with the disclaimer.