The Difference Between a Prime Broker and a Custodian

The Difference Between a Prime Broker and a Custodian

In modern financial and investment fields, transactions can be completed in seconds. However, this velocity hides complex procedures that take place with the participation of the primary broker and custodian. Although these services do not always require various providers, they provide instant trade fulfillment. In the blog post, we will discuss the distinctions between prime broker vs custodian in more detail.

What is a Prime Brokerage?

Dealing with prime brokers is integral to hedge funds’ activities if they need to place an order. It may be done over the phone or online; to do this, you will need to gain access to the account with an intermediary. The clearing broker will perform all the work related to cleaning the transaction.

In addition to the processes listed above, such a counterparty will help find financing to make trading operations as efficient as possible. In other words, this financial market entity can lend capital to a hedge fund to buy and sell assets.

The prime broker is also ready to perform administrative and legal tasks related to commercial activities, including filing documents on trading activity with the tax authorities. At the end of the financial year, it provides reports to its users and may suggest several useful economic recommendations.

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What is a Custodian?

As we understand from the title, custodians guarantee the safe storage of assets participating in the transaction. Let’s consider the main features of such a market participant:

  • This title arose before the active spread of digital technologies when it was necessary to print securities documents and transmit them to custodial services for safekeeping. Today, repositories exist in electronic format, but they still provide secure and timely transfer of assets.
  • When a purchase or sale of securities occurs, the custody provider moves a digital record, similar to a securities document, to the purchaser’s account and receives capital from the client to finish the operation.
  • If we compare prime broker vs custodian, then custodial activity is more sophisticated. It requires maximum professionalism and efficiency to instill trust among counterparties.

Brokers provide limited operations with a minimum number of specialists, while custodians are establishments that have earned wide recognition. They often have a long experience and a famous brand. The activities of custody providers are strictly controlled.

Prime custody refers to the personalized servicing of resources in alternative investment portfolios. Both financial market entities can perform these functions to ensure greater transparency and reduce risk.

The Difference Between a Prime Broker and a Custodian

Security and Trust

If we are talking about a custody account vs brokerage account, launching a prime broker requires much less capital than forming a custodian organization. Such a broker may hire only several specialists to answer the phone calls and a small number of experts to monitor documents. Therefore, it may be difficult for large investors to entrust all their savings to such a small company. At the same time, a custody provider is often a nationally recognized establishment with great experience and a well-known brand. State and regional authorities constantly monitor the performance of custodians to prevent fraud, serious mistakes, and loss of solvency.

Integrated Services

Some institutions offer prime broker vs custodian services simultaneously. It is often a better option for users since everything is kept internal to the organization. Such organizations can usually suggest their services to customers with the most favorable interest rates.

In addition to providing custodial services to clients, they may cooperate with brokers. The last without custodial services are often expensive because they must pay extra to get such follow-up.


Prime brokerage vs custodian is a different financial sector establishment with unique goals and objectives. Prime brokers interact with large financial market entities, like hedge funds. At the same time, custodian providers share user resources and do not store them on their balance sheets. It protects customers in case of the counterparty’s loss of solvency or other economic difficulties.

Custodians earn income through commissions charged for their custody services, and brokerage organizations profit from commissions and spreads incurred when executing trades. To understand which counterparty is best for you to interact with, assess the scale of your activities and primary goals.