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Goldman Sachs Moves into Prime Brokerage

At a time of increasing interest in prime brokerage services, Goldman Sachs has raised the bar by releasing its proprietary prime brokerage model online. The platform has been developed using the functionality of Goldman’s front and back office trade management and risk systems, which are used in all of the firm’s global offices.

In line with Goldman’s operating ethos, the prime brokerage system is not an “FX only” product. John Godfrey, executive director, FX and derivatives prime brokerage, explains, “Prime brokerage is part of our overall offering and the technology we have developed is an extension of our real-time, global IT infrastructure, which is compatible across derivatives. The fact that our organisation is not silo-oriented enables us to work across product lines to offer truly unique solutions.”

Goldman is a late entrant into the prime brokerage market; however, the firm sees this as a distinct advantage. Zar Amrolia, managing director and global head of FX sales, says that Goldman has been able to build one of the first online prime brokerage systems because it started from scratch and did not have to cope with a legacy system.

Currently the platform supports all spot and forward currency transactions as well as NDFs and currency options. “We plan to add cross-currency and interest rate swaps, credit derivatives, futures and securities related options, derivatives and swaps based on client demand,” says Mel Gunewardena, managing director and head of FX and derivatives prime brokerage. “Given our technology, these products can all be introduced with relative ease,” he says.

Gunewardena adds, “Our work around the physical segregation of the prime brokerage organisation and the technology platforms supporting this business from our trading and sales areas ensures the highest level of confidentiality and security for our clients.”

Using the System

The system is easy to use and is Web-based, which allows for frequent upgrades and development without the need for software installations. The technology is based on real-time messaging, allowing clients to see updates and new transactions within moments. Security is ensured using 128-bit encryption.

The home page of the portal has four main features: bar charts indicating clients’ credit usage with all relationship banks, a trade blotter, impending expirations and trade events and a summary of upcoming net settlements. As with Goldman’s core WebET offering, the bank says all features of the prime brokerage platform are highly configurable. The bar charts offer clients a visible method to manage their liquidity lines at a glance.

Transaction management is facilitated using the trade blotter, through which many aspects of the prime brokerage business can be managed. The blotter is also configurable by any range of trade, settlement and expiration dates. The display can be configured and sorted by product, value date, client account, channel of communication, individual trader, ‘give-up’ bank and custodian. All trades are colour coded according to operational status which enables clients to monitor trade confirmation and settlement status on a real-time basis.

The blotter displays top-level trades, and by clicking on an individual trade full details are provided, including any allocations. Net settlement information is provided for cash management purposes and static data such as settlement instructions (the client’s and the bank’s) are available. Coupled with Goldman’s in-house matching systems, the portal can enable clients to eliminate the need for third party matching services, further reducing operational costs.

Levels of Sophistication

The bank says that further work is being done to provide high levels of direct connectivity with key clients’ internal systems, providing even higher levels of straight-through processing. Stephen Li, vice president, FX & derivatives prime brokerage, New York adds, “We are currently working with a client to accept direct trade feeds from their internal trading systems, providing immediate electronic matching with the trades given up by the dealer banks and reporting exceptions in real-time. In addition, our systems will provide a complete reconciliation of the entire portfolio at the end of each trading day.” Godfrey adds, “We are not trying to push a generic product in front of our clients, rather we are partnering with key clients to develop customised solutions, which in turn enable the development of flexible systems with multiple options available to a wider range of clients”.

Collateral management is calculated using the same proprietary VaR analytics developed for the firm’s own risk management. Similarly, an array of reporting is available, including P&L reports and the Greeks, such as vega and theta. These reports will be added to the online portal in coming weeks, the bank says.

Risk Management

Aside from operational efficiencies, Goldman also sees potential for clients to greatly enhance their internal risk management and trader control functions. By channeling all trading activities through a prime broker who can provide comprehensive portfolio reporting to risk managers via a website, clients can independently verify the activities of their trading desks. The bank’s product allows clients to set up different accounts by trader, location or trading strategy virtually replicating the way Goldman’s clients manage their risk. This allows for easy reconciliation with existing internal controls.

Underlying support for Goldman’s offering comes from what the firm considers to be one of its strongest competitive advantages: technology. Amrolia states, “We are a top-three provider of FX services and have market-leading technology to support this. We are simply opening up our technological capabilities to our clients so that they can execute their business more efficiently. This is a good combination for our clients.”

Looking ahead, Goldman is working on linking its prime brokerage offering directly to its core WebET offering. “Having a sophisticated online prime brokerage offering contributes nicely to our overall suite of electronic services, creating efficiencies which allow us to reach a deeper market segment. We are enlarging our footprint by providing superior, comprehensive services,” says Cyril Cottu, the bank’s head of e-FX.

Profit & Loss

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