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Prime Broker Portfolio Management

We recently implemented a prime broker reporting system for a hedge fund investment institution, the first and only solution of its kind running in SharePoint. To help you to appreciate this solution, let me explain what a prime broker account is before discussing the effort involved.

A prime brokerage account is a type of financial account that is offered by investment banks and other financial institutions to hedge funds, wealth management firms, and other institutional clients. The main purpose of a prime brokerage account is to provide a range of services to these clients, including trade execution, settlement, financing, and reporting.

Prime brokerage accounts work by allowing the client to execute trades and transactions through the prime broker's platform, rather than having to deal with multiple counterparties or execute trades directly on an exchange. This can help streamline the trade process and reduce costs, as well as provide other benefits such as access to credit and risk management tools.

In addition to executing and settling trades, prime brokers may also offer other services to their clients, such as providing financing for trades, reporting on portfolio performance, and offering clearing and settlement services. They may also provide access to a wide range of financial instruments, such as equities, bonds, derivatives, and currencies.

Overall, prime brokerage accounts can be a useful tool for institutional clients looking to streamline their trade execution and access a range of financial services and instruments in a single, integrated platform.

Margin calls are typically calculated by a prime broker when the value of the assets in a client's account falls below a certain threshold, known as the maintenance margin. This threshold is set by the prime broker and is typically a percentage of the total value of the assets in the account.

To calculate a margin call, the prime broker will first determine the current value of the assets in the client's account. If this value falls below the maintenance margin, the prime broker will issue a margin call, requiring the client to either add more assets to the account or sell some of the existing assets to bring the account value back up to the required level.

The exact formula for calculating a margin call can vary depending on the specific terms of the prime brokerage account and the financial instruments involved. However, in general, it involves comparing the current value of the assets in the account to the maintenance margin and calculating the difference between the two. If this difference is negative, a margin call is triggered.

There are several considerations that may be taken into account when calculating a margin call, including:

  • Maintenance margin: The first consideration is the maintenance margin, which is the threshold at which a margin call is triggered. This is typically set by the prime broker and may vary depending on the specific financial instruments involved and the terms of the prime brokerage account.

  • Current value of assets: The second consideration is the current value of the assets in the client's account. This value is used to determine whether the account falls below the maintenance margin and a margin call is required.

  • Financial instruments: Different financial instruments may have different margin requirements, so it is important to consider the specific instruments being traded when calculating a margin call.

  • Market conditions: Market conditions can also impact the calculation of a margin call. For example, if the market is experiencing significant volatility, the value of the assets in the account may fluctuate more rapidly, which could impact the calculation of a margin call.

  • Risk management: Prime brokers may also consider the overall risk profile of the client's account when calculating a margin call. For example, they may require higher margins for accounts with higher levels of risk or volatility.

Overall, it is important for clients to understand the margin call requirements of their prime brokerage account and to have a plan in place to meet these requirements in a timely manner. Our client have been doing this process manually for the last 14 years by compiling a series of Excel spreadsheet and manually adjusted the different parameters.

This process is done at the closing of every trading day by a team of highly trained financial analyst for each prime broker. It takes the team of five people around 3 hours to complete the calculations. This report is required by the chief investment officer to assess their exposure and risks so that he can advise his trading team on the trading strategy for the next day to reduce the margin call for their organization.

The accuracy of this report and the ability to simulate different trading strategy to determine the optimal portfolio to reduce the margin calls from the various prime broker affects the bottom line of this hedge fund.

Automating this process is crucial for our client's success, and we are proud to be implementing it. However, due to its sensitive and proprietary nature, we cannot disclose the specifics. But if SharePoint can handle such a complex and crucial business function, imagine its potential for your business.

What would you like to build with SharePoint today?

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