Foreign Exchange Operations: Master Trading Agreements, Settlement, and Collateral

CHAPTER 7

Foreign Exchange Prime Brokerage

Foreign Exchange Prime Brokerage is a service offered by large foreign-exchange-dealing banks to hedge funds, investment companies, commodity trading advisors, and other investment and trading concerns. The concept of prime brokerage began in the equity and bond markets; the prime brokerage idea was adapted for the foreign exchange community in early 1990s and has since become a standard in the industry, especially with hedge funds and investment companies.

King and Mallo (2010) reported:

Foreign exchange prime brokerage activity has increased rapidly over the past decade. The April 2010 survey by the London Foreign Exchange Committee reported that 16 percent of all foreign exchange (and 29 percent of spot) transactions are conducted via a prime brokerage relationship.

This chapter will investigate the nature and structure of FX Prime Brokerage relationships from the standpoint of the client, the executing dealers, and the prime broker itself.

OVERVIEW OF FX PRIME BROKERAGE

FX Prime Brokerage is a service wherein a Designated Party—the “customer”—is allowed to use the trading lines of an FX Prime Broker to execute foreign exchange transactions with a dealer, called the Executing Dealer. The FX Prime Broker becomes the actual party to the transaction, standing in for the Designated Party in a process. This is called a give-up trade. Simultaneously, the FX Prime Broker and the Designated Party enter into an identical trade. This second ...