Questionable benefits of prime brokerage

The fact that RBS has seen the departure of senior and well-respected staff is a sign that it has recognised that FX prime brokerage is not the money-spinner senior management hoped it would be.

This is partly due to RBS's approach. Some market participants say the bank was aggressive in its pricing, charging far less than the $10–15 per million that is common for large PB transactions from other banks. This aggressive stance may have won the bank large volumes, but judging by the restructuring of the e-commerce team it didn't do much for the bottom line.

However, it is questionable how much value FX prime brokerage is adding even to other banks who are charging higher rates. While it is delivering some brokerage fees, it is hard to know whether banks are mortgaging their future to get them. The big question no-one knows the answer to is whether credit is being priced correctly. This will only become evident when the next large hedge fund blows up.

There is a danger that prime brokerage is being used by banks as a loss leader. There is evidence that this is occurring in the burgeoning algorithmic trading space. Here, particularly, costs for prime brokerage have decreased quite considerably. In one sense this is understandable, because the lack of human involvement means the business is cheaper to transact. However, the main component of what investors are paying for – credit – becomes no cheaper because it is e-traded.

Bargain basement FX prime brokerage should help banks drive through multi-asset class business, but it is delivering risk to banks with a very uncertain and unquantifiable return. It is also highly questionable whether it will have the desired effect of drawing in other types of business. While traditionally, banks have relied on human relationships to foster customer loyalty, this will be very much harder to achieve with a prime brokerage set-up that is largely transacted via a computer screen.