Custodial servicing is the most important function provided by prime brokers to hedge funds. These custodial services are required for the number of trades and positions taken by the hedge fund managers.
The prime brokers provide the following custodial services:
Receipt, delivery and safekeeping of securities: When a trade is made, the financial securities, such as debt and equity, are transferred from the sellers to the buyers. This may happen in physical or electronic format. Prime brokers provide this services so they are responsible for receipt, delivery, recording, and safekeeping of securities. They maintain the records of trades, positions, and valuations of securities purchased and sold.
Notification and processing of capital changes: Prime brokers also provide services where they monitor the changes in the capital structure of companies, report these changes to the funds and create appropriate records of the impact of these changes on the investments. The changes in capital structure may occur because of issuance of new debt or equity, and impacts the valuation of securities held by existing investors.
Redemptions, conversions, exchanges, tender offers: Prime brokers also take care of activities such as redemption of securities on maturity, conversion of debt to equity under certain provisions, closing debt and buying securities, and Treasury stock transactions. The prime brokers monitor all these things for reporting and record-keeping purposes.
Exercise or sale of rights issues: The prime brokers also monitor and record the activities related to rights issues and warrants.
Processing dividend and interest income: The prime brokers also monitor dividends and interest income associated with equity and debt to ensure that accrued interest and dividend payments are recorded and paid appropriately.