Daiwa Securities’ plan to grow its alternative fund services in Asia will continue to move forward following the sale of its synthetic prime brokerage to Canada’s Bank of Nova Scotia last week for an undisclosed sum, according to the Japanese firm.
The business employs 40 staff, mostly in London, with regional desks in Hong Kong and New York. About six to seven employees are based in Hong Kong, according to Dominique Blanchard, Daiwa’s global head of derivatives. Clients of the synthetic prime brokerage will continue to be served under Bank of Nova Scotia, he adds.
"Globally we will continue to have a stock lending and borrowing business, but regarding the synthetic prime brokerage, we will not be in that space anymore in Asia," says Hong Kong-based Blanchard. In the region, the synthetic prime brokerage desk offers hedge funds with exposure to 14 markets in Asia-Pacific through equity swaps.
Bank of Nova Scotia, through its Scotia Capital investment banking arm, has spent the past several years building up a global prime services business, primarily targeting smaller hedge funds. It has existing synthetic prime brokerage services in North America, but lacked coverage in Europe and Asia – markets that it will gain through the Daiwa deal.
The decision to divest the business is a consequence of Daiwa's move last year to end its joint venture with Japanese commercial bank Sumitomo Mitsui Financial Group. Daiwa acquired the 40% of the business it did not own from SMFG. The result was a reduced client base for the prime brokerage service. "There was less reason to be in that space, which requires a large balance sheet and which [has] quite a lot of [activity] outside of Asia," says Blanchard.
Daiwa’s synthetic prime brokerage in Asia was a part of the group’s synthetic finance products and services offerings in the region, including exchange-traded funds, which had been a business earmarked for growth.
The synthetic prime brokerage was also a component of Daiwa’s global asset services arm, which provides fund administration services to the alternatives sector. Its market share in Asia is small, falling outside of the top 10 administrators when measured by assets under administration, according to Eurekahedge.
As with the synthetic finance business, the fund services arm was positioned for expansion in the region. Both divisions will be "unaffected" by the sale of the prime brokerage, says Blanchard.
Another Japanese giant, Mizuho, earlier this year shuttered its Singapore-based synthetic prime brokerage operations after two years of operation. It had failed to attract adequate clientele, which an industry source attributed to a lack of investment in staff and operational infrastructure on the part of Mizuho.
Daiwa’s sale of its synthetic prime brokerage is part of a firm-wide restructuring plan in response to the global market downturn. In October, it unveiled plans to eliminate 300 jobs in a bid to cut more than $500 million in costs.
It marks a U-turn from a ¥100 billion ($1.2 billion) Asia expansion plan announced in 2009, which was intended to be a stepping stone to a wider global presence. It aimed to become one of the top five brokers globally by March 2012 and one of the top 10 investment banks by March 2013 in Asia ex-Japan.
"With the ongoing market balances, we are focusing on what we have, and generating revenues out of that rather than going for enormous expansion at this stage," says Blanchard. "There’s no change of plan. We will do it as market conditions come back."