Deutsche Bank The collapse of Lehman Brothers in September 2008 caused significant panic in the financial markets. Hedge fund investors learnt an important lesson related to the risks of their money being tied up in a bankrupt entity due to ‘rehypothecation’ risk, sparking billions of US dollars of redemptions from the remaining two broker-dealers, Morgan Stanley and Goldman Sachs. While massive injections of public and private sector funds shored up the financial system, the market upheaval resulted in other prime brokers, notably European banks, breaking the pair’s dominance in the market moving into 2009. Deutsche Bank was one such counterpart. Although not unaffected by the financial crisis, the German bank still secured significant wins in terms of market share. During the past year, it has maintained this momentum against a backdrop of a smaller overall market – assets managed by hedge funds in Asia, while growing again due to international funds setting up desks there and the build-up of Asian start-ups, are about $140 billion, versus more than $200 billion pre-crisis, according to an April survey published by AsiaHedge. It has achieved this despite Morgan Stanley and Goldman Sachs aggressively reasserting themselves to regain the market share they lost as a result of withdrawals in the aftermath of the Lehman collapse. Harvey Twomey, Deutsche Bank’s Hong Kong-based head of global prime finance sales for Asia Pacific, believes his team would have achieved its current market position – the firm is ranked third by AsiaHedge with assets under management of $15.6 billion – even if the crisis had not taken place. Hedge funds interviewed by Asia Risk support this assertion, stating Deutsche Bank’s prime brokerage is synonymous with stable financing options, strong capital raising capabilities and multi-asset, multi-market margining and execution. And that is proving to be an attractive combination for start-ups. “From Australia to Singapore, Korea, Japan, Hong Kong and China, we estimate we have captured half of the 55–60 pure start-ups that were launched in the region in 2009,” Twomey says. Allan Bedwick, principal at OGI Global Macro Fund in Tokyo, says Deutsche Bank’s prime brokerage sets the bar high for other service providers trying to win his fund’s second prime broker mandate since his fund hit $100 million. “They have given us tremendous market access and allowed us to focus on growing our assets,” says Bedwick. “They have given us fantastic capital efficiency, partly due to the fact they are good about netting across products we trade. They pull in their cap intro team for us and we have never felt we are a small fund that gets lower priority.” A key service that Bedwick and others cited is an intermediation service that Deutsche Bank has put together for his fund’s forex and fixed-income trades, especially for the latter, which helps with balance sheet constraints. The service allows OGI to give up all its forex and fixed-income trades to Deutsche Bank through just one credit support annex (CSA) facility established with Deutsche Bank’s prime brokerage unit. As a result, OGI does not have to establish CSAs with each counterparty it trades with as its counterparties face Deutsche Bank instead of OGI. “Even for a bigger fund, [a one-point CSA] gives you a lot of capital efficiency. And because of netting of all your products and trades from one collection point, you get the best netting possible with the least margin requirement. So, when you need it, you get maximum leverage,” says Bedwick. The same cross-margining capability, this time across both listed futures and options, and over-the-counter derivatives across markets globally, was also an important attribute that Frank Holle, partner at Singapore-based Quant Asset Management, which manages $135 million, views as essential from his service provider. The fund trades across 58 countries worldwide and owns 200 stocks every month against which the fund shorts index futures. “We have been engaging with Deutsche as the only prime broker we use,” says Holle. “We need a real global broker as we trade all over the world, and integrated reporting in terms of all our long and short [positions].” Twomey attributed the ability to provide clients with cross-margining and stable margining rates to the bank’s in-country, local fundraising capability with Asian financial institutions. This enables Deutsche Bank to margin a broader array of clients’ assets to obtain secured financing across both fixed income and equities. As Asia has become important as the source of liquidity, the bank has also set up a two-person financial resource management team, a dedicated funding function serving exclusively the prime brokerage division in the region. By maintaining a close relationship with Asian financial institutions across 14 markets, Deutsche Bank’s financing team within the prime brokerage group can efficiently raise funding using local currency assets through the bank’s network of local operating licencees and credit lines established with local financial intermediaries. “The goal is to have multiple but stable secured sources of financing,” he says. “If there is a shock in the financing market, our structure permits the bank and the prime brokerage team to maintain a strong funding profile, absorbing volatility and ultimately passing those benefits onto our clients.”...
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