Eamon McCooey, head of Prime Services, Wells Fargo Securities explains how the company is stepping into the breach left by FCMs exiting the self-clearing business.
Q. What were the drivers behind Wells Fargo’s acquisition of Merlin in 2012?
A. The acquisition of Merlin in August 2012 served as a springboard and was part of a strategic plan to build out a prime brokerage capabilities within Wells Fargo Securities. Hedge funds are also good consumers of bank products and we wanted to increase our cross selling opportunities across the Wells Fargo enterprise. Merlin, which was rebranded Wells Fargo Prime Services, was a one stop shop with fully integrated execution, technology and reporting capabilities that focused on emerging managers that had below $100m of assets under management. The firm’s services ranged from pre-trade processes to performance attribution, capital introduction and other services critical to the emerging manager client segment. Larger hedge fund managers traditionally go directly to the larger institutional prime brokerage platforms.
Q. How have you developed the business over the past three years?
A. We started building out the business in earnest in January 2014 with the first step consisting of a dedicated project team that included people from risk, technology, operations, compliance and legal. The programme encompassed integrating all the workflow streams of both the existing emerging manager and proposed self-clearing organisations that are integral to a prime brokerage relationship into a consolidated programme plan. These included margin lending, FX, rates, corporate actions, securities lending, settlement, regulatory and risk controls as well as legal and compliance. From a technology standpoint, we also automated workflows, improved online functionality and customised data reporting. We also extended the focus beyond the emerging hedge fund manager segment and are leveraging off the legacy platform to engage with a broader institutional client base by offering them a larger complementary set of product and services including balance sheet.
Q. How have you built out the self -clearing capacity?
A. Wells Fargo is one of the largest bank by market capitalisation and one of the safest given our strong credit rating and liquid balance sheet. This resonates with institutional investors especially hedge funds which were key factors in company’s decision to extend the prime brokerage platform into offering self-clearing capabilities in 2013. This has involved a comprehensive build out of our custody and settlement systems, compliance and regulatory monitoring and reporting capabilities as well as leveraging off the existing legacy Merlin reporting infrastructure. We have also made numerous hires to complement the legacy team members across sales, capital introduction, product development and new business management. We have also added staff to legal, compliance, technology, regulatory reporting, credit and operations to support our offering. Many of the people that we hired have experience working in firms with large prime brokerage offerings.
Q. What have you done to develop the service since getting Financial Industry Regulatory Authority (FINRA) approval last August?
A. We needed the approval of FINRA in order to launch our self-clearing products because it is focused as a prime brokerage offering within a US broker-dealer structure and adheres to regulatory margin rules. The asset classes covered are equities, listed options, convertibles, corporate and other DTC-eligible asset classes. It was an in-depth process and we had to provide great detail on our plans and project build-out.
We offer a comprehensive prime brokerage model –a self-clearing prime-brokerage business aimed at smaller hedge funds as well as one for larger alternative asset managers. We have recently picked upon-boarded legacy emerging manager business from those who have exited the mini prime brokerage business for introducing brokers as well as larger institutional managers that like Wells Fargo’s liquidity and safety. We have an active pipeline of on-boarding boarding opportunities this quarter and next and by the end of the year we should have roughly 150 to 175 new clients on our self-clearing platform.
Q. Do you think you there are more opportunities today due to the retrenchment on the sell-side because of Basel III and other more stringent regulations?
A. Pre-crisis, asset managers selected prime brokers on their capabilities to service their funds whether it was long short or convertible arbitrage, etc. Between 2008 and 2012, the main priority was the safety of assets and the counterparties they were facing. From 2013 we entered the era of financing liquidity and capacity. Basel III and most particularly, Supplementary Leverage Ratios (SLR), Liquidity Coverage (LCR) and the net stable funding ratios (NSFR) are having a significant impact on the prime brokerage operating model. It is forcing many of the mature prime brokers to re-evaluate their business models and right size based on parameters that are important to their organisations. Many are not looking to grow but to optimise their business which means gaining a full understanding of who their client base is and how much balance sheet they are consuming. This involves looking at important metrics such as return on assets (ROA), return on equities ROE), comprehensive capital analysis (CCAR) as well as the different regulatory stress tests. One of the challenges is that they may not be able to service or fund all of the strategies of a hedge fund because some do not fall within the high quality liquid assets definition of LCR. This becomes more expensive and firms may decide not to cover these clients on an on-going basis.
Q. So do you expect to see other FCMs entering and filling the gap in to the space? What resources do you need?
A. I do expect to see other FCMs institutions enter into the prime brokerage space but not everyone will be able to given extensive resources required. One of the most important things is to have is a liquid balance sheet as well as the excess robust operational and technological capacities to benefit from these opportunities. One of our main advantages as I noted is that emerging as well as larger managers look to us as a balance sheet liquidity provider and a safe counterparty. By leveraging our existing infrastructure we are also able to provide prime brokerage and self- clearing services to a broad spectrum of clients who are engaging in a wide range of strategies.
Q. What is the next stage of development?
A. We are about two and half years into a multi-year build out. At the moment, our model focuses on US based assets but the future plan is to support clients that have assets and structures offshore. We are also continuing to automate workflows and developing a reporting suite as well as workflow tools for internal client representatives. In general prime brokerage and self-clearing are resource intensive businesses and we are investing in our infrastructure, operations, technology and scale so that we can stay competitive.
