For a Forex Broker, one of the most challenging aspects of the business is dealing with their liquidity needs. Forex Brokers that could not qualify for their own Prime Brokerage account were left to having multiple accounts with many other brokers. Some Brokers would use FXCM and Saxo as their liquidity sources but need to have multiple accounts. Trying to keep track of positions and to manage a book from multiple accounts like this is very challenging if not impossible. Especially if the broker does not use a trade reporting system to keep track of everything.
Until recently if a Forex Broker was going to establish liquidity relationships they would need to go the Prime Brokerage route. This means that they would need to have a PB account with one of the Tier One Banks like Citibank, JP Morgan, UBS or a Goldman Sachs. The requirements for a Prime Brokerage account varies from Bank to the bank but it usually is in the 10’s of millions of dollars. Approval can take months and recently this hasn’t gotten any easier. Since the SNB even of last January Banks have become extremely risk averse and have in many cases raised the requirements for Forex PB or have gotten rid of the offering altogether. The Prime of Prime Broker really came about as a direct solution for those brokers that were looking to save the cost and the headache of setting up their own liquidity.
There are many Prime of Prime Brokers out there so how do you find the right one? There are several things that a Forex Broker really needs to take into consideration. The most obvious but sometimes overlooked is regulation. Does the regulator require the Prime of Prime to hold margin on top of their net capital requirements? It is now more important than ever to know the counterparty that you use has requirements on their exposure as well. Another obvious but sometimes overlooked item is the financials of the POP. If an event like an SNB does occur would they be around the next day or are they able to weather a storm?
Another important and often overlooked aspect of choosing a Prime of Prime is the infrastructure. Do they have server security and connectivity around the globe? Think about where you are clients are located. If you have many clients in a place like China this can be especially challenging. Make sure that the POP has a server located in Hong Kong or somewhere in Asia where it is easier for the clients to connect from.
For many brokers, the Prime of Prime is great solution and way to avoid the expense and hassles of sourcing liquidity. As always it is really important to know who you deal with very well as this will be a key component to the overall operation of your brokerage.
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