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Difficulty: EasyBroker-Dealers, Investment Advisers, and Intermediaries

A hedge fund executes securities transactions across multiple separate executing broker-dealers to access specialized liquidity. To streamline operations, the hedge fund contracts with a single firm to hold custody of its assets, clear and settle all trades, and provide consolidated account statements. Which financial intermediary fulfills this centralized custodial and clearing role?

  1. Prime brokerAnswer
  2. B
    Transfer agent
  3. C
    Depository Trust & Clearing Corporation
  4. D
    Investment adviser

Answer

Prime broker
A prime broker is a specialized broker-dealer that offers institutional clients (such as hedge funds) a single centralized master account for trade clearing, asset custody, margin financing, and consolidated account reporting, even when trades are executed across multiple separate broker-dealers.

Step-by-Step Solution

1
Analyze the operational requirements of the institutional investor described in the stem.
The hedge fund needs one central firm to aggregate trades from multiple executing brokers, provide asset custody, clear trades, and deliver consolidated reports.
Large financial institutions frequently execute trades with different broker-dealers to obtain research or liquidity while keeping trade consolidation under one roof.
2
Match the institutional operational requirements to the appropriate market intermediary.
A prime broker is designed specifically to handle master clearing, custody, and reporting services for institutional accounts.
Prime brokerage relationships allow clients to consolidate margin requirements and trade confirmations across multiple executing brokers.

Key Concept

Prime Brokerage Functions and Institutional Services
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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