The following description is taken from the web site of a second tier prime broker. "[ ] is a second tier prime broker that provides financial institutions, hedge funds and professional trader's totally unrestricted access to the FX markets through a choice of multi-bank portals allowing them to trade with multiple counterparties at the best rates with deep liquidity, using a prime broker's credit line. Our prime broker is a member of the world-wide CLS (credit link settlements) which was formed to eliminate cross-border credit risk associated with currency settlements." Focusing only on the second tier prime broker's credit risk factor, can fellow ET members explain whether a client's money will be safe in the event of such broker's insolvency, given that the client will have a contractual relationship with the second tier prime broker only, but not counterparties? The underlying assumption is that there is no investor protection scheme in the US or UK in relation to cash FX transactions.
pls provide some context to your enquiry... is this purely academic or are you currently trading fx - spot or futures - in a size / monthly volume that wld warrant using a (second-tier) prime broker?
This is a complicated topic, and even a seasoned bankruptcy lawyer probably is not going to be able to give you an unqualified opinion. The Refco situation is still being sorted out, for example. That said, I think you are basically correct in your assumption that an insolvency involving the second tier broker could conceivably put your funds at risk. I think the risk increases if the insolvency arises due to a default or blowup by one of the second tier broker's customers. Futures commission merchants, eg brokers, are required to segregate customers' funds, but they are not segregated individually. So if one client blows up, all are at risk. I would guess the same sort of scheme applies with FX brokers, although it would depend upon the regulatory authority. In bankruptcy, the basic rule is that like classes of creditors are treated the same. An account holder or customer is typically an unsecured creditor, and hence at the end of the line when it comes to retrieving funds.
2cents: At this stage, largely academic. I trade both cash and futures FX, mainly through IB. In terms of generating the volume befitting a second tier prime brokerage client account, I'm not quite there yet. For example, I did 10 6E, 12 6B and 20 6C round-turns yesterday, which is a little above average for me. Nonetheless, if things go well, there's every reason to believe that my turnover will increase signifcantly in 1 to 2 years' time. ************************************ AAAintheBeltway: Very good points! Many thanks. Although I'm not a Refco customer, I try to follow events in the proceedings to see how things turn out. Apparently, one of the arguments made by (non-customer) creditors' lawyers hinges on fund segregation. It seems that credit risk is something worth investigating thoroughly. There's no point in practicing money management religiously, only to be let down by an event like Refco's. Any suggestions regarding cost-effective and safe (in terms of fund security) platforms to trade forex for an individual trader with, say, $1 million trading funds would be most welcome!
with that sort of acct size you can go straight to RBS, UBS etc... they'll give you access to their quotes plus to whichever ECNs you ask for (depending on how much volume you do...) as long as you trade in $1mio equivalent clips or more they'll be happy. with a secondary prime, they'll definitely expect you to do some good volume, 1yard/mth or more, to make it worthwhile for them to set you up etc... of course everything is negotiable and not everything is expected from you from day 1... but its only worthwhile to go to a second-tier prime if you need / want additional leverage, since you'll be paying an extra-layer of costs here, and have your funds parked with a lower-ranked institution (credit rating)... run a search on ET for ECNs, prime brokers etc... as far as security of funds, AAA has covered the point pretty well at this stage... ask again when u get closer to making a choice. all the best ;-)
Thanks, 2cents, for your helpful reply, especially highlighting one of the key reasons for going with a 2nd tier PB - additional leverage. Right now, I still prefer the flexibility to scale in and out, if only to make mistakes less expensively... It follows that a $1 mio minimum trade size is probably too constricting. We'll see... I've read many of your interesting posts here. Life must be fun as a professional trader in Tokyo. Do you live on US hours, if I may ask? Happy trading!
well its 1:15am here right now... so i guess yes, i do US morning session... nothing much to trade in the morning tokyo time anyway, except for the occasional kiwi/aussie figure... and i dont like yen pairs... IB's probably good enough for what you are doing now and with their universal acct and funds protection scheme - also, Def wrote to me once that if you have issues with their max ticket size limits, you shld call them and they have solutions... other options for you if you want to continue to trade in 100K units increment for a while and build your ticket size gradually: hotspot retail (1:50), fxcmpro / currenex (1:100)... both good options... i still use fxcmpro/currx... however dont like currenex in fast mkts... but thats just me... cheers!
Thanks for the suggestions, 2cents. Would you happen to know of another Currenex white label operator (other than FXCMPro) which allows 100,000 unit trades? I'm a little wary of FXCMPro due to its Refco connection and threads such as: http://www.elitetrader.com/vb/showthread.php?s=&postid=927230#post927230 Have you or any of your friends had experience with COESfx?
no personal experience with coesfx... i've read about some teething problems but they might have turned a corner by now, otherwise they just wouldn't be around any more currenex white labels: http://www.currenex.com/about_us_partners.html i use odl as my second-tier prime broker, initially they got rbs to give me access (to currenex) but things may have changed by now who else than fxcmpro doesn't mind too much 100K units clips on currenex, i dont know... call them, thats what i did... but honestly you'd save yourself some time going to hotspot retail... fxcmpro, they are rather good actually, spread and liquidity-wise... i'll disagree with kevin schmidt, their spreads are pretty good, but yes they do add 1 pip on exit since they dont charge commissions... expensive but thats for people who are not quite ready / at the size for a prime brokerage relationship... am not sure what particular aspect you'd like me to comment on but basically i am still using them from time to time