Types of Long Cash Balances at Prime Brokers

March 18, 2025
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Written by Usman Cheema

In an increasingly competitive landscape, hedge funds and asset managers are under pressure to extract maximum value from every component of their operating model. One of the most underutilized yet highly impactful levers is cash segmentation — the strategic classification and management of cash across different liquidity profiles and operational purposes.

At PB-Advisor, we’ve worked with funds of all sizes to implement smarter segmentation strategies that enhance yield, improve transparency, and optimize treasury performance without increasing risk exposure.

What Is Cash Segmentation?

Cash segmentation is the process of dividing a fund’s cash holdings into distinct categories based on their purpose, liquidity requirements, and investment horizons. Typically, we define three key segments:

  1. Operational Cash: Required for daily liquidity needs, margin calls, settlements, etc
  2. Reserve Cash: Held for contingency or regulatory purposes, with medium liquidity needs
  3. Strategic/Surplus Cash: Not immediately required and suitable for yield-enhancing opportunities

By clearly distinguishing these buckets, treasury teams can apply different investment strategies, risk profiles, and governance frameworks to each — rather than treating all cash as equal.

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Type of Cash
Description
Interest Rate
Balance Sheet Impact
Key Considerations
Short Credit
Cash from short sales
Benchmark (flat)
Reduces Net Ledger Debit; no indirect
Requires 102–105% collateralization; FX conversions
Standard Credit
Long cash offsetting debits in other currencies
Benchmark – 25 to 75 bps
Offsets NLD; no direct balance sheet asset
Often grouped with Free Cash, but has different PB economics
Free Credit
Unencumbered, withdrawable cash
Benchmark – 25 to 200 bps (highly variable)
100%+ asset impact due to LCR liquidity buffers
Triggers >100% LCR; treatment varies across PBs; often blended with Standard Credit
CMP Cash
Segregated client cash under regulations (e.g., FCA CASS)
Benchmark – 100 to 300 bps
Varies: 0% to 100% of asset impact, PB dependent
Held at external banks; regulatory protections; PB methodologies vary significantly
Term Cash
Committed cash for a fixed term (32+ days)
Benchmark for term ± 0–100 bps
No direct or indirect asset impact
Requires documentation (e.g., side letter); favorable funding treatment for PBs
Note: All balance sheet impacts refer to the asset side, which drives the PB’s financial resource requirements