Forex Brokers have been avoiding the b-word for the past several years. The model was thought to be set in stone. You have your Prime Brokerage account then you setup your liquidity relationships and presto you have a Forex Broker ready to deal with all types of clients. This year has presented several large challenges for many new Forex Brokers that have thrown a wrench into this model. Since the Black Swan event of last January, Banks and liquidity providers have moved away from dealing with Retail Forex Brokers. Their respective risk departments have made getting a Prime Brokerage account nearly impossible. Many Banks have completely dropped Prime Brokerage services altogether. Another result of the SNB move was the drastic reduction of leverage afforded to the Retail Forex Broker.
For an unregulated Forex Broker, this is can give reason to take another look at the old B book model. Over the past few years Risk Management technology has improved greatly and not having a PB or liquidity providers would reduce the cost dramatically. Those brokers that use MetaTrader 4 would also have the additional cost of “bridge fees” which are necessary to connect price aggregation systems to the world’s most popular trading platform. One of the main issues that would face the unregulated Forex Broker looking to b book is how to handle position exposure as it the client base grows. For these brokers, this becomes an internal business decision. Hope to be that the risk is comparable to their capital and resources available to the broker.
For the regulated Forex Broker, the b book option is usually not one or can be limited by the regulatory requirements on position limits. In many cases in addition to regulatory capital the broker might also need to have capital to cover the positions of their clients. For the all the major regulatory bodies these requirements will most likely increase over the next year.
The B Book model might be an attractive alternative for new unregulated Forex Brokers. The key issue for these brokers is to make sure that they are acting responsibly when it comes to Risk Management.
Trading Forex and Derivatives carries a high level of risk, including the risk of losing substantially more than your initial investment. Also, you do not own or have any rights to the underlying assets. The effect of leverage is that both gains and losses are magnified. You should only trade if you can afford to carry these risks. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary