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Tag: equities

  • What is a Prime Brokerage and Who Uses Their Services?

    A prime brokerage is a bundled group of services offered by investment banks and other financial institutions. Investment banks may offer these services to hedge funds and other large investment clients that have a need to be able to borrow securities (or cash), in order to engage in “netting” to achieve “absolute returns”.

    What is Netting?

    Netting refers to offsetting the value of multiple positions, or payments, due to be exchanged between two or more parties. Typically, it’s used to determine which party is owed compensation in a multiparty contract.  Additionally, utilized as a method of reducing risks in financial contracts by combining or aggregating multiple financial obligations to arrive at a net obligation amount. Netting reduces settlement, credit, and other financial risks between two or more parties.

    What is an Absolute Return?

    An absolute return indicates the return an asset receives over a specific period. This measure looks at the appreciation/depreciation that an asset – such as a stock or mutual fund – has achieved over time. Absolute returns differ from relative returns in that there’s no benchmark comparison. The absolute return is concerned with the return of that specific asset over a period of time. An easier way to think of an absolute return is by its other reference, total return. Therefore, the gain or loss of an asset or portfolio is measured independent of any other standard. Absolute returns may be positive or negative and they may also bear no correlation to other market activities.

    Who Typically Utilizes Prime Brokerage Services and Who Provides Them?

    Hedge funds would amongst the first category of prime brokerage clients. Legally, clients may not access prime brokerage services for less than $500,000 in equity, even though it’s typical for clients to have over $50M in equity. High net worth private investors are another popular category of prime brokerage clients.

    On the other hand, prime brokerage services are generally offered by large investment banks. These institutions benefit from economies of scale to bundle multiple financial service offerings with more efficiency, at a cheaper cost. Some of the most notable firms who offer prime brokerage services include Goldman Sachs, BAML, JPMC, Citigroup, and BNY Mellon. Services bundled include largely “back office” tasks like asset custody, financial reporting, cash/securities lending, investor introductions, and risk consulting.

    Historically, Goldman Sachs has been known as the most reputable prime brokerage. However, their prime brokerage agreements are such that smaller hedge funds would have difficulty meeting their expected capital requirements. More recently, Pershing – an elite BNY Mellon subsidiary – has become the backbone of the prime brokerage street business. Combining the custodial services BNY Mellon is renowned for, with Pershing’s uniquely skilled investments and alternatives specialists, gives the duo a unique marketing position within the prime brokerage business. Pershing’s “prime services” are highlighted by risk management consulting. Additional offerings include securities lending, financing solutions, trade execution, technology, liquid alternative investments, and more. Within the alternative investment niche, which is extremely frequently accessed by hedge funds, Pershing has built an impeccable reputation.

  • What is a Prime Brokerage and Who Uses Their Services?

    A prime brokerage is a bundled group of services offered by investment banks and other financial institutions. Investment banks may offer these services to hedge funds and other large investment clients that have a need to be able to borrow securities (or cash), in order to engage in “netting” to achieve “absolute returns”.

    What is Netting?

    Netting refers to offsetting the value of multiple positions, or payments, due to be exchanged between two or more parties. Typically, it’s used to determine which party is owed compensation in a multiparty contract.  Additionally, utilized as a method of reducing risks in financial contracts by combining or aggregating multiple financial obligations to arrive at a net obligation amount. Netting reduces settlement, credit, and other financial risks between two or more parties.

    What is an Absolute Return?

    An absolute return indicates the return an asset receives over a specific period. This measure looks at the appreciation/depreciation that an asset – such as a stock or mutual fund – has achieved over time. Absolute returns differ from relative returns in that there’s no benchmark comparison. The absolute return is concerned with the return of that specific asset over a period of time. An easier way to think of an absolute return is by its other reference, total return. Therefore, the gain or loss of an asset or portfolio is measured independent of any other standard. Absolute returns may be positive or negative and they may also bear no correlation to other market activities.

    Who Typically Utilizes Prime Brokerage Services and Who Provides Them?

    Hedge funds would amongst the first category of prime brokerage clients. Legally, clients may not access prime brokerage services for less than $500,000 in equity, even though it’s typical for clients to have over $50M in equity. High net worth private investors are another popular category of prime brokerage clients.

    On the other hand, prime brokerage services are generally offered by large investment banks. These institutions benefit from economies of scale to bundle multiple financial service offerings with more efficiency, at a cheaper cost. Some of the most notable firms who offer prime brokerage services include Goldman Sachs, BAML, JPMC, Citigroup, and BNY Mellon. Services bundled include largely “back office” tasks like asset custody, financial reporting, cash/securities lending, investor introductions, and risk consulting.

    Historically, Goldman Sachs has been known as the most reputable prime brokerage. However, their prime brokerage agreements are such that smaller hedge funds would have difficulty meeting their expected capital requirements. More recently, Pershing – an elite BNY Mellon subsidiary – has become the backbone of the prime brokerage street business. Combining the custodial services BNY Mellon is renowned for, with Pershing’s uniquely skilled investments and alternatives specialists, gives the duo a unique marketing position within the prime brokerage business. Pershing’s “prime services” are highlighted by risk management consulting. Additional offerings include securities lending, financing solutions, trade execution, technology, liquid alternative investments, and more. Within the alternative investment niche, which is extremely frequently accessed by hedge funds, Pershing has built an impeccable reputation.

  • Financial Markets Outlook Q4 2022 – Thoughts on Late September/Early October Bear Market Rally

    As the sell-off of stocks intensified into late September 2022, the S&P 500 lost all gains from the previous calendar year in September 2021. Coupled with an annual slump of 24% – the lowest since November 2020 – many were quick to point out the likelihood of a short-term bear market rally. This wasn’t (and isn’t) unjustified at all. During inflationary periods, as we entered this year by definition after two consecutive quarters of negative GDP growth, current stock market trends seemed to point to a classic “bottoming out”. An asset that has “bottomed out” reached its low point and could be in the early stages of trending upward. That’s the real question most investors are asking. Given all the global financial market dynamics that have been putting downward pressure on prices, are they ready to rebound? Will it be a short-term bear market? Will there be any noticeable rebound at all? What are the chances of a long-term bear market cycle? These are all questions investors are keen on getting more insight into daily.

    How Are Financial Markets Looking for the Remainder of Q4 2022?

    Shaky and unpredictable, at best. Specifically looking back at the S&P 500 trends, October, like September, tends to be a comparatively volatile month. This is coming off a year where more than half the trading days saw movements above or below 1%, indicating high general volatility.

    Before we get to the Fed policy, let’s quickly mention something many people are overlooking; current problems plaguing the UK. When we’re talking about the general trend of global financial markets, the US and UK generally follow similar patterns. In 2008, when the US recession hit, did the UK not feel the impact too? Ominously, the UK has already been in recession for a full year. Furthermore, S&P Global is predicting a “tough winter” for EU markets. Add that to the ongoing currency crises the GBP and EUR are currently experiencing and one would not be out of line at all to believe that the UK, as well as struggling countries in the EU, will fall into an even deeper recession. Surely – if that were to happen – it would obviously not bode well for US financial markets.

    But more realistically, actions taken by the Fed regarding inflationary concerns are what investors are eyeing more closely. Let’s take a deeper look at the Fed’s policy to combat inflation and how that’s impacting financial markets.

    The Fed’s Continuously Shifting Narrative on Inflation

    It’s important to first point out the Fed’s inflation narrative and, accordingly, their policy has shifted dramatically the past year. In fact, just last year Fed officials said inflation “wouldn’t be a problem”. Shortly later, the Fed promised us it would be “transitory” inflation. Now, they’re shifting to a “soft landing” inflation for the economy, amidst hiked up rates and economic downturn. As evidence of the deflationary attempts being rejected mounts, the Fed will undoubtably continue to move the bar.

    Why is that concerning for financial markets and moreover, market participants? Generally – intuitively, this should be especially true during times of economic uncertainty – investors often look to the Fed for guidance. Meaning, the majority of market participants will react to news from the Fed in real time. Even more specifically, they’ll take a bearish or bullish position based on what the Fed is saying at that time. David Schassler, Head of Quantitative Investment Solutions for VanEck, noted the same.

    “Market participants have been slow to catch up with the party line — and that’s reflected in the wild volatility. The market has failed to recognize the threat of inflation. Unfortunately, we think the idea of a soft landing is a bit of a fairy tale, and investors can expect a lot more volatility”.
    -David Schassler, VanEck Investments
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    But what’s more concerning is that even the Fed knows, for deflation to be successful, there also has to be a drop in demand. It doesn’t appear, nor is anyone really reporting, that there is any drop in demand. That’s starting to have – quite significant at that – ramifications on the global supply chain. Regardless of the reason – it could be the “COVID-10 lockdowns” J.P. Morgan hypothesized – at this point we know we are heading towards a global supply chain “crisis”. On top of a potentially botched deflation, we could see increased – rather than decreased – demand meet supply shortages, which would equal very rapid, upward prices until demand swings back down. Factoring back in how shaky the global economy looks at present, I think it’s extremely difficult to confidently say we’re definitely not going to have a financial crisis-like recession sometime in 2023. As many have said, time will tell.

    Conclusion for Q4 2022

    Concisely, we’re likely entering even darker waters than we’ve been in. That goes for capital markets, equities, indices, and related securities. Savvy investors will start looking at alternative investment products, while at-risk assets continue to have a negative long-term outlook. During times of financial uncertainty, investments in real estate (physical assets, more broadly) are usually a better value risk. High-value commodities, like gold, are known to do well in recessions (no, not Blockchain technology). High-value commodities such as gold in general are a quintessential hedge against a deflating dollar (USD) value.

    While we want to make it abundantly clear if there is a bear market, we expect it to be a short-term bounce back. To reiterate, the long-term macroeconomic outlook right now looks bleak. However, we also don’t want to give the incorrect impression that we are predicting a 2008-like financial collapse. Many have speculated that today’s CDOs are the mid-late 2000’s MBS products that led to the widespread 2008 financial collapse, however the comparison is a false equivalency.

    The safeguards we’ve put in place since 2008 prevent the kind of collapse we witnessed during that time. We have new volatility ratios that dual-acting (depository/investment) banks must strictly maintain. We have new regulatory reporting and compliance procedures banks have entire departments of staff dedicated to. The biggest investment banks in the world have literally thousands of dedicated employees specifically for regulatory reporting and compliance projects. My genuine belief is most active market observers understand we’re smart enough to learn from 2008 and avoid a repeat.

    However – needless to say – we’re still imperfect. With the way the global financial system now operates, there can only be winners if there are also losers. That dynamic is becoming more apparent at an upward trajectory. The biggest winners are becoming bigger (wealthier) and the biggest losers are becoming poorer. Interestingly, according to Fox, the last few recessions have statistically benefitted the “rich of the rich”.

  • Is India’s UPI (Unified Payments Interface) Technology Worth Selling Overseas and to Western Countries?

    The Unified Payments Interface (UPI) was created by the National Payments Corporation of India (NPCI) for purposes of “enabling digital payments and settlement systems in India, is an initiative of RBI and IBA”. As announced in Bloomberg in June 2022, the NPCI is looking to take UPI to overseas markets. This implies that a) the technology has been tested thoroughly and successfully in Indian markets and b) there is currently no real competitor to UPI in overseas markets. At one point, NPCI CEO Ritesh Shukla compared it to a “home-grown alternative to SWIFT”. For those who aren’t familiar, SWIFT is a Belgium-based cross-border payments system operator.

    Has the Product [UPI] been Thoroughly Tested in Indian Markets?

    Based on our research, yes UPI has been tested both rigorously and successfully in Indian markets.

    “We have displaced cash in India to a large extent and are now looking to repeat the success in cross-border corridors. Overseas Indians can use our rails to remit money inwards straightway into their bank accounts, and for the markets where Indians travel frequently, we will build acceptance for our instruments.”
    – NPCI CEO, Ritesh Shukla
    Tweet

    Not only has the technology behind UPI been proven and tested, but the methodology has also succeeded. At least that’s the quantitative claim Shukla’s making. The World Bank data seems to support the analysis too. Indians overseas remitted $87 billion in 2021; the biggest inflow for any country that was tracked by the World Bank.

    Under the RBI’s “Liberalized Remittance Scheme”, all resident individuals (including minors) are allowed to freely remit up to USD $250,000 per year. This is from April-March, for any permissible current or capital account transaction, or a combination of both. Further, resident individuals can avail of the foreign exchange facility, for specific purposes within the limit of USD $250,000 only. The RBI’s “Scheme” was introduced on February 4, 2004, with a limit of USD $25,000 (BusinessDesk, Bloomberg). Since then, the LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. Notably, the “Scheme” is not available to corporates, partnership firms, HUF, Trusts etc.

    Are there Any Notable Comparisons to India’s UPI Abroad (not factoring in SWIFT)?

    Of the $87 million in remittances India received in 2021, the US was the biggest source (World Bank). According to the World Bank, US remittances to India accounted for over 20% of the $87 million in 2021.

    “Flows to India (the world’s largest recipient of remittances) are expected to reach $87 billion, a gain of 4.6 per cent with the severity of COVID-19 caseloads and deaths during the second quarter (well above the global average) playing a prominent role in drawing altruistic flows (including for the purchase of oxygen tanks) to the country”.
    – World Bank Spokesperson, World Bank Migration and Development Brief, 2022
    Tweet

    In terms of total global remittances, India is followed by China, Mexico, the Philippines, and Egypt (World Bank). In India, remittances are projected to grow 3% in 2022 to $89.6 billion. This is reflective of a drop in overall migrant stock, as a large proportion of returnees from Middle Eastern countries are still awaiting return (World Bank).

    Remittances in low-and-middle-income countries are projected to have grown a strong 7.3% to reach $589 billion in 2021 (World Bank). This “return to growth” is far more robust than earlier estimates. Following the same resilience of flows in 2020, when remittances declined by only 1.7% despite a severe global recession due to COVID-19, according to estimates from the World Bank’s Migration and Development Brief. Lastly, the brief in its entirety can be found here, from the World Bank’s website.

    Outside of evaluating the micro-differences to SWIFT, there are no current notable competitors to India’s UPI we could find. Without any doubt, no possible comparisons would come close in terms of size or scale.

  • Is India’s UPI (Unified Payments Interface) Technology Worth Selling Overseas and to Western Countries?

    The Unified Payments Interface (UPI) was created by the National Payments Corporation of India (NPCI) for purposes of “enabling digital payments and settlement systems in India, is an initiative of RBI and IBA”. As announced in Bloomberg in June 2022, the NPCI is looking to take UPI to overseas markets. This implies that a) the technology has been tested thoroughly and successfully in Indian markets and b) there is currently no real competitor to UPI in overseas markets. At one point, NPCI CEO Ritesh Shukla compared it to a “home-grown alternative to SWIFT”. For those who aren’t familiar, SWIFT is a Belgium-based cross-border payments system operator.

    Has the Product [UPI] been Thoroughly Tested in Indian Markets?

    Based on our research, yes UPI has been tested both rigorously and successfully in Indian markets.

    “We have displaced cash in India to a large extent and are now looking to repeat the success in cross-border corridors. Overseas Indians can use our rails to remit money inwards straightway into their bank accounts, and for the markets where Indians travel frequently, we will build acceptance for our instruments.”
    – NPCI CEO, Ritesh Shukla
    Tweet

    Not only has the technology behind UPI been proven and tested, but the methodology has also succeeded. At least that’s the quantitative claim Shukla’s making. The World Bank data seems to support the analysis too. Indians overseas remitted $87 billion in 2021; the biggest inflow for any country that was tracked by the World Bank.

    Under the RBI’s “Liberalized Remittance Scheme”, all resident individuals (including minors) are allowed to freely remit up to USD $250,000 per year. This is from April-March, for any permissible current or capital account transaction, or a combination of both. Further, resident individuals can avail of the foreign exchange facility, for specific purposes within the limit of USD $250,000 only. The RBI’s “Scheme” was introduced on February 4, 2004, with a limit of USD $25,000 (BusinessDesk, Bloomberg). Since then, the LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. Notably, the “Scheme” is not available to corporates, partnership firms, HUF, Trusts etc.

    Are there Any Notable Comparisons to India’s UPI Abroad (not factoring in SWIFT)?

    Of the $87 million in remittances India received in 2021, the US was the biggest source (World Bank). According to the World Bank, US remittances to India accounted for over 20% of the $87 million in 2021.

    “Flows to India (the world’s largest recipient of remittances) are expected to reach $87 billion, a gain of 4.6 per cent with the severity of COVID-19 caseloads and deaths during the second quarter (well above the global average) playing a prominent role in drawing altruistic flows (including for the purchase of oxygen tanks) to the country”.
    – World Bank Spokesperson, World Bank Migration and Development Brief, 2022
    Tweet

    In terms of total global remittances, India is followed by China, Mexico, the Philippines, and Egypt (World Bank). In India, remittances are projected to grow 3% in 2022 to $89.6 billion. This is reflective of a drop in overall migrant stock, as a large proportion of returnees from Middle Eastern countries are still awaiting return (World Bank).

    Remittances in low-and-middle-income countries are projected to have grown a strong 7.3% to reach $589 billion in 2021 (World Bank). This “return to growth” is far more robust than earlier estimates. Following the same resilience of flows in 2020, when remittances declined by only 1.7% despite a severe global recession due to COVID-19, according to estimates from the World Bank’s Migration and Development Brief. Lastly, the brief in its entirety can be found here, from the World Bank’s website.

    Outside of evaluating the micro-differences to SWIFT, there are no current notable competitors to India’s UPI we could find. Without any doubt, no possible comparisons would come close in terms of size or scale.