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 various accounts like this is very challenging if not impossible. Primarily if the broker does not use a trade reporting system to keep track of everything.
Until recently if a Forex Broker were going to establish liquidity relationships, they would need to go to 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 came about as a direct solution for those brokers that were looking to save the cost and the headache of setting up their 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 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 critical than ever to know the counterparty that you use has provisions for 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 the 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 an excellent solution and way to avoid the expense and hassles of sourcing liquidity. As always it is essential to know who you deal with very well as this will be a crucial component to the overall operation of your brokerage.