Prime brokerage

Prime brokerage is a suite of services that a broker-dealer, known as the prime broker, offers to sophisticated institutional customers — most commonly hedge funds, but also large money managers and other active trading institutions. The prime broker acts as the client's central hub for custody, financing, and settlement.

In a prime brokerage arrangement, the client can place trades through multiple executing brokers to access different markets or research, while all of those trades settle and are held in one account at the prime broker. The prime broker consolidates the positions, provides a single statement, extends margin loans, lends securities for short selling, and handles clearing.

The structure exists because active institutions need services a standard brokerage account doesn't provide. A hedge fund running long and short positions across many counterparties would otherwise face fragmented recordkeeping and financing. Centralizing custody and margin at one firm simplifies operations, improves financing terms, and gives the fund a consolidated view of its portfolio.

Prime brokerage accounts appear on the SIE and Series 7 exams as a type of account registration. Know the basic structure — one prime broker providing custody, financing, and consolidated reporting while trades may be executed away through executing brokers — and that these accounts serve institutional, not retail, customers.