9
I
Prime Custody: Achieving Asset Protection & Operational Simplicity
Early Prime Custody offerings brought to market have been
constrained to two basic models and have done little to evolve
their capabilities since initial launch. Yet, the SPV or trust
still exists within the broker-dealers’ infrastructure and the
disposition of those assets in a bankruptcy proceeding is not
clear, particularly as you consider various legal jurisdictions.
In one approach, a special purpose vehicle or trust was set
-up as a distinct legal entity from the broker-dealer to allow
excess securities to be moved out of prime broker accounts
and into these arrangements. This model allowed for funds to
continue to monitor and manage both their prime broker and
custody accounts through their existing service relationship
and allowed for an effective exchange of data and reporting
across these two accounts.
A second Prime Custody model moved securities completely
out of the broker-dealer entity and off the broker dealer
infrastructure, shifting excess securities to third-party
custodians. This arrangement was perceived as offering
greater broker dealer bankruptcy protections but feedback
from market participants highlighted fairly substantial
concerns about the increased operational complexity of having
to work across unrelated entities.
Citi’s Prime Custody solution provides the benefts and avoids
the pitfalls of both models by combining two established and
market-leading global businesses—thus providing a broader
geographic reach than any competitor worldwide. Our
solution physically moves assets off the Citi broker-dealer
bankruptcy protection.
Citi’s Prime Custody solution features normalized data
exchanged systematically, online tracking of security
movements and consolidated reporting (including hypothetical
buying power) between prime brokerage and custody
accounts. Our solution allows for the entire relationship to be
managed through a single point of contact and off existing
Prime Finance tools for operational ease.
With Citi’s Prime Custody solution, investors can achieve their
desired level of asset protection in an operationally simple and
intuitive manner.
Conclusion
Concerns about asset protection increased after the fnancial turmoil of 2008, as hedge funds and the
institutional investors channeling capital to those investment managers focused on the new risk around
counterparty exposure and the safety of excess assets held in prime broker accounts. To combat those concerns,
prime brokers are now offering new “prime custody” arrangements, whereby funds can shift excess assets
away from the broker-dealer legal entity into remote arrangements that offer greater protections in case of
bankruptcy. These solutions become especially important in periods of market turmoil such as those witnessed
in the summers of 2010 and 2011.