Scotia Capital's prime brokerage business looks to global opportunities

Date: Friday, June 22, 2007
Author: Hedgeweek.com

Scotia Capital may be a relative newcomer to the global prime brokerage market, and although the global corporate and investment banking and capital markets arm of the Scotiabank Group proclaims that it is not looking to go head-to-head with the Wall Street bulge-bracket banks, the firm has been busy building a considerable international profile.

Scotia Capital already has securities lending operations in New York, London and Toronto, and plans to extend the business capabilities and products offered through its Singapore office, where the firm already offers capital introduction services.

The Scotia Capital prime brokerage business - still just four years old - is building on this momentum by adopting a measured yet brisk approach to expanding into new geographical markets as well as expanding its expertise in terms of asset classes, according to managing director and head of global equity finance, Jim Buckley.

This strategy reflects the global emergence of multi-strategy hedge funds that are demanding greater capabilities from their prime brokers. 'As international barriers have started to come down, fund managers want access to their risk management tools in whatever form they require it,' he says. 'Firms that offer better delivery and better service will win the day.'

However, Buckley insists that Scotia Capital has no plans to compete head-on with the bulge-bracket firms by trying to be 'all things to all people'. Instead, the firm is happy to build up relationships with clients that will enable both parties to grow. 'We're working with a number of firms to help them develop,' he says. 'We pride ourselves upon having a strong value proposition and proactive client service, and we want to continue that model.'

First and foremost, winning and retaining business is about core services. 'Get the settlements and reporting right,' Buckley says. The operations side of the business is such that, if you get one thing wrong out of fifty, it's the mistakes that the customer remembers. Once you overcome that hurdle, it's about capital introduction, finding out the client's growth plans, and working to help them achieve their objectives.'

Service providers should always strive to 'stick to their knitting' and avoid being distracted from their value proposition, Buckley argues, but they still need to be able to adapt to the changing needs of their hedge fund clients. 'Funds are increasingly responsive to market conditions, and as some instruments and strategies go out of style,' he notes, 'they will seek to incorporate new traders and strategies that can produce alpha.'

Buckley points out that this approach has been prompted by market cycles in areas such as convertible arbitrage. 'Many funds have adopted a more multi-strategy model in order to evolve with market cycles,' he says. 'By being responsive, they can still produce returns for investors at times when their original strategies may not work for them, while others will continue to offer a pure convertible arbitrage opportunity, if that's what investors want.'

'Prime brokers need to respond to the challenges of their clients, so they must be nimble and fleet of foot, or risk losing some or all of the business. As more and more instruments are introduced into the market, the prime brokers that are best equipped to risk-assess those trades properly and source them to the degree that the clients want to go short, will win the business and enhance their relationships with clients.'

Larger fund managers often develop multiple prime broker relationships, a trend that poses a serious challenge in terms of information management. Says Buckley: 'There's a greater requirement to have open-source architecture for data delivery as funds move to multiple prime models, in order to facilitate consolidated position reporting. This requires the prime brokers to be flexible in the way they deliver data to the fund. It will be interesting to see whether outsourcers try to fill that gap by providing consolidation of data as a service to funds.'

Scotia Capital's choice of Singapore as a base in Asia was driven in part by the bank's already established presence in the city-state, which dates back nearly a quarter of a century. 'Because we have a structured products group based in Asia, we wanted to benefit from the economies of already having a presence in the region,' Buckley says. 'Singapore is becoming an industry hub, which is prompting a number of the bulge-bracket firms to choose it as a location. It is close to several important centres in the region, including Beijing, Shanghai and Hong Kong, and it's roughly halfway between Tokyo and Australia.'

He notes that Singapore has also gained ground, at least temporarily, on rival jurisdictions such as Hong Kong through the flexibility of its regulatory framework for hedge funds. 'The Monetary Authority of Singapore has provided an open framework for funds that want to establish in the region,' he says. 'Singapore has the advantage now in terms of allowing fund registration to take place more speedily, although we'll see if any of the other Asian regulators respond.'

While Asia, like other markets, is seeing its share of funds that trade with assets of USD500m and more, Buckley acknowledges that the many smaller funds launched in the region may be particularly appropriate for Scotia Capital's partnership-based approach. 'The big funds may be a good fit for the bulge-bracket firms, but there are also smaller and mid-tier players that we would be well suited to service.'

According to Buckley, Scotia Capital's expertise in its home market is a particular draw in Europe, a market that is both fragmented and highly competitive thanks to a combination of domestic players and the biggest international firms. 'You really need to choose your strategy to be able to position yourself in Europe,' he says, 'and Scotia Capital has been relying on its service model.'

'With some of the European funds, we certainly have valued strength in our Canadian expertise and the ability to service Canadian shares. We're talking to hedge fund managers that are deploying energy and mining strategies to see how we can better service their needs in those areas.'