Adapting to Wholesale Change in the Prime Brokerage Industry

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The combination of changing financial regulations, capital and leverage requirements, shifting structure across the hedge fund industry and a global search for alpha amid low interest rates have placed enriched financial data at a premium. Unless investment banks and securities firms adapt their business models to these market forces, their prime brokerage businesses will feel the squeeze to provide high-caliber insights while remaining profitable and keeping clients satisfied.

In line with these trends, our team at Jefferies Prime Brokerage was tasked with finding a sustainable, lower-cost alternative to the expensive data vendors on the market. Committed to keeping high standards in secure, online reporting that formed the foundation of our success, we needed a system that would allow clients to query and check portfolio positions, performance and risk in real-time. Such access is crucial to providing the desk-level decision support, hypothetical analysis, portfolio stress models, value-at-risk calculations and “best hedge” recommendations that satisfy our customers’ wants.

Tackling the problem head-on, we partnered with IBM and its Watson Financial Services team to apply new technologies from the cloud for Jefferies and our global spectrum of partners working across equities, fixed income, foreign exchange, futures, commodities and wealth management products. Our intent was to achieve superior data efficiency using standardized models and data quality checkpoints that would inform our investment decisions. This, in turn, would yield higher returns from our global securities lending, portfolio risk management, trade execution, clearing and settlement, research and cash management services.

It’s still early days, but in the short time that we’ve explored the project with IBM, our prime brokerage business has successfully scaled back its reliance on higher-fee market, reference and reporting data vendors by 90 percent. Fundamentally, the integrated data and risk management feed we’ve now built has transformed analytics use in the financial services sector from a costly and daunting prospect into an exciting, original opportunity to work with startup and established hedge funds seeking absolute returns.

As the battle to leverage growing volumes of data and risk analytics rages on, new sophisticated analytics and artificial intelligence – a space where IBM has already made great strides – could represent the next frontier for Jefferies’ risk, portfolio management and trading professionals, especially as we serve an increasingly diverse client base with multiple investment strategies, asset classes, and valuation methodologies.