UBS commitment to prime brokerage reaffirmed

InvestorsOperational RiskPeople MovesPrime Brokerage
19 Nov, 2012

UBS’s prime brokerage business will not be scaled back despite massive cuts in other parts of the bank.

Two banking sources confirmed they were confident UBS would retain a prime brokerage business while a third said it was a dead cert.  It was announced earlier this month that UBS was splitting off and winding down its fixed income operations as it continues to refocus on wealth management and strive to meet Basel III capital requirements. This has provided some competitors with an opportunity to question whether UBS is serious about retaining prime brokerage.

A less self-interested analysis must take account of the ostentatious nature of the renewed commitment to the equities business. No equities business can thrive without a successful prime services group. The firm created a new financial services group earlier this year in which its prime brokerage outfit was merged with global synthetic equities. The unit is headed by Jason Barron, formerly head of global equity derivatives, and the man who had the unenviable task of winding down Kweku Adoboli’s unauthorised trading positions which cost the bank $2 billion.

It is a remarkable testimony to the ability of the prime brokerage group at UBS to retain the loyalty of clients that, despite everything the senior management and a rogue trader has thrown at them and staff turnover at multiple levels in the last five and half years, the bank has throughout continued to score unexpectedly well in the annual survey of prime brokers conducted by Global Custodian magazine – especially among larger funds.

Nonetheless, UBS is taking nothing for granted, and hedge funds report that UBS is busy communicating with clients about the latest changes in order to reassure them of its continuing commitment to the equities business.

The main challenge UBS must confront is the negative sales pitch of competitors arguing that the bank is no longer a full service investment bank. “Bulge bracket banks offer a variety of services and not just prime brokerage,” said one competitor. “Clients go to those banks in order to access all of these services, which complement prime brokerage. UBS’s cuts will impact some of these services which could affect its prime brokerage business.  I doubt UBS will remain a Tier 1 bank but it will continue to work with hedge funds albeit slightly smaller managers.”

In fact, the 2012 Global Custodian survey suggests that the widespread belief that UBS services mainly smaller clients is misplaced. More than half its respondents to that survey are running over $1 billion, and a third more than $5 billion.

Merging equity finance and synthetic equities is the kind of integration hedge fund managers have long sought from every prime broker. Even if the merger poses a host of political and technological challenges, it is undoubtedly a move in the right direction.

UBS has had a tumultuous time since the crisis began. It was among the first to enter the critical period when it closed Dillon Read Capital Management in May 2007, and at the bottom of the crisis had to be supported with $50 billion of Swiss taxpayers’ money. In 2009, the US government negotiated a $780 million settlement with UBS over alleged tax evasion by US citizens, following revelations by a whistle-blower. The Adoboli trading scandal, which is currently playing out in British courts, has led to serious questions being asked of the bank’s risk management.

Adoboli trading scandalBasel IIIGlobal Custodianglobal synthetic equitiestax evasionUBS