Document Type
Case Study
Case Series
Basel III
JEL Codes
G01, G28
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.
Recommended Citation
McNamara, Christian M. and Metrick, Andrew
(2019)
"Basel III E: Synthetic Financing by Prime Brokers,"
Journal of Financial Crises: Vol. 1
:
Iss. 4, 91-100.
Available at:
https://elischolar.library.yale.edu/journal-of-financial-crises/vol1/iss4/7
Date Revised
2020-01-01
Included in
Banking and Finance Law Commons, Finance and Financial Management Commons, Organizational Behavior and Theory Commons, Policy History, Theory, and Methods Commons, Public Administration Commons, Public Policy Commons, Securities Law Commons, Transnational Law Commons