Basel III E: Synthetic Financing by Prime Brokers

Andrew Metrick

Journal of Financial Crises, 2019, vol. 1, issue 4, 91-100

Abstract: Hedge funds rely on "prime brokerage" units within banks to provide leverage. With the enhanced capital requirements and new liquidity standards introduced by Basel III driving up the cost to banks of engaging in such financing, prime brokers have begun to offer an alternative means of providing hedge fund clients with leveraged exposure to securities. Known as synthetic financing, this alternative requires the prime broker to enter into derivatives contracts with the clients. Under the Basel III framework, the ability of banks to hedge and net such derivative positions results in capital and liquidity costs for synthetic financing that are lower than those for traditional securities financing. This case considers whether synthetic financing should be treated differently than traditional securities financing for capital and liquidity requirement purposes, as well as considering the risks associated with the shift toward synthetic financing.

Keywords: Prime Brokers; Basel III; synthetic financing; hedge funds; securities financing; total return swaps; BIS; derivatives (search for similar items in EconPapers)
JEL-codes: G01 G28 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
https://elischolar.library.yale.edu/cgi/viewconten ... -of-financial-crises (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ysm:ypfsfc:1477

Access Statistics for this article

More articles in Journal of Financial Crises from Yale Program on Financial Stability (YPFS) Contact information at EDIRC.
Bibliographic data for series maintained by ().