Examkin

Question

Difficulty: MediumMarket Participants and Investor Classifications

A hedge fund manager executes stock orders through multiple different securities firms throughout the day to access specialized research and best execution. However, to simplify back-office administration, all trade clearing, margin financing, stock loan services, and consolidated account reporting are handled by a single broker-dealer. Which of the following market participants is performing this centralized administrative role for the hedge fund?

  1. Prime brokerAnswer
  2. B
    Executing broker-dealer
  3. C
    National Securities Clearing Corporation (NSCC)
  4. D
    Qualified Institutional Buyer (QIB)

Answer

The prime broker is the market participant responsible for providing centralized clearing, custody, margin financing, and consolidated account reporting for institutional clients.
Prime brokerage is a bundle of specialized services offered by broker-dealers to institutional clients such as hedge funds. When a client trades with multiple executing brokers, the prime broker clears the trades, holds custody of securities, provides margin financing and stock lending, and renders a single consolidated account statement.

Step-by-Step Solution

1
Analyze the operational scenario described in the item stem.
The hedge fund uses multiple firms for trade execution but requires a single entity to consolidate clearing, margin lending, custody, and reporting.
Institutional investors such as hedge funds often separate trade execution functions from administrative and financing functions.
2
Match the institutional service requirements to the correct market participant entity.
Prime brokerage accounts allow an institution to execute trades with various broker-dealers while settling all transactions into a single main account.
The prime broker maintains custody of the client's assets, provides financing on margin, and issues consolidated account statements.

Key Concept

Prime Brokerage Services and Institutional Market Participants
Estimated Time:1m 0s
Rate this question

Topics

Market Participants and Investor Classifications

More questions from this topic