When Societe Generale struck a deal to buy Newedge in its entirety in 2014, some in the industry wondered one simple question — why?
Newedge had been on the selling block for years and futures broking and clearing was not, and still is not, considered a hot growth area in the derivatives space. Societe Generale and Credit Agricole held a 50/50 stake in Newedge at the time. But SocGen, as it is often called, decided Newedge was worth the investment.
In May 2014, SocGen purchased Credit Agricole’s half for $371 million and devised a new plan to combine the strengths of SocGen’s banking services with Newedge’s execution and clearing of listed and OTC products. Newedge was renamed SG Prime Services, but it is much more than a renamed entity.
Chris Topple, co-global head of SG Prime Services, said the team approached the project as a brand new entity. It looked at other prime broker models on the street such as JPMorgan Chase, Morgan Stanley, HSBC and Goldman Sachs, but ultimately it decided that a new model was needed in the current economic and regulatory environment. The challenge was folding what was once an agency broker firm into the larger bank structure.
SocGen decided to put several businesses into one group, SG Prime Services, which includes the FCM, OTC clearing and the fixed income, FX, equity and synthetic prime brokerages. It also moved SocGen’s equity finance business in as well. SG Prime Services, if you are drawing an outline, falls under the larger Global Markets division of Societe Generale Corporate and Investment Banking.
Topple said the acquisition and restructuring achieves two things. It ties together the FCM and OTC interest rate trading and clearing, and secondly, provides its equity derivatives unit a with much larger balance sheet. Newedge, as a stand-alone entity, had a balance sheet of about $1.45 billion. Today, SG Prime Services has the backing of the bank with a much larger balance sheet and strong capital ratios.
The new entity also transformed the equity finance prime brokerage business, which grew from about $33.4 billion to around $445 billion with the equity finance and cross-asset finance units folded into SG Prime Services group.
Newedge was always one of the top clearing member firms in the futures space, (it ranked third in Futures Magazine’s Top 40 Brokers report in 2014), but was limited as a non-bank FCM. SG plowed almost $200 million into SG Prime Services to integrate the different business units, back-end systems, establish new legal entities and so on. With that investment and combination with Societe Generale, SG Prime Services could target much larger institutional participants, such as large asset managers.
“We were known to have a broad array of expertise across the execution and clearing side, and then to have the financial backing of Societe Generale, we were suddenly relevant to those clients,” Topple said. “The growth we’ve seen across the institutional asset management space for both the FCM and the OTC clearing has been very, very significant.”
In total, the group has grown from about 180 people under Newedge’s prime services division to about 400 today, and revenues and profits were up more than 30 percent in 2015 from a year earlier, Topple said.
In terms of US segregated customer assets, a barometer of the size of an FCM, SG Prime Services has increased 18.4 percent over the past two-plus years, according to CFTC filings. The firm reported $15.4 billion in segregated customer funds in first quarter of 2016, up from $14.2 billion at the end of 2015, and $13 billion at year-end 2014.
SocGen isn’t the only bank to invest and grow its prime brokerage division. Others, however, expanded their balance sheets too far as a percentage of their overall capital markets business and have since scaled back or shuttered certain business lines to meet new regulatory capital requirements. That has provided an opening for SG Prime Services.
“We’ve come from a position that was smaller. So as a percentage of the overall balance sheet of capital markets, that is actually an area that you want to allocate to,” Topple said. “It’s achieved the targets that were set out and outperformed on the revenue side. It’s still a growing area at a time when other firms are more circumspect in terms of the clients they are targeting and the returns they are expecting.”
Some banks have pulled back on their business units. In April, for example, SocGen took on most of the clients from Jefferies Group’s Bache futures unit, which was shuttered by its parent. But Topple said the growth at SG Prime Services is more than just a reshuffling of customer accounts from one place to another.
“We are acquiring new clients that we want to acquire and we’re doing more business with our existing clients,” he said. “Our commitment to this sector has made us far more relevant. We’re not undercutting our competitors in terms of price. We’re pricing that business at levels we think are sustainable for the current regulatory cost in terms leverage, and in terms of looking forward.”
In other words, SG Prime Services has worked out ways to bring in revenue other than from traditional interest rate streams and commissions.
“The prime services fee pool continues to grow year on year, and with the number of banks pulling back, there is an overall scarcity of capacity,” Topple said. “We feel there is scope for us to grow at profitable levels. And whether from luck or judgement, our timing seems to be pretty good.”