On January 15, 2015, the SNB (Swiss National Bank) caused a massive upheaval in the FX industry when they manipulated the exchange rate of the franc and unpegged their currency against the euro. This action threw the markets into complete panic, ultimately producing capitulation with the CHF pairs and creating catastrophic losses throughout the industry. Market participants were affected across the entire spectrum, all the way from the top tiered global banks down to individual investors.
The large banks and market makers were able to absorb the losses (or major gains if B Book), but the smaller, more vulnerable, participants could not. Some brokerages were forced to close their doors due to negative balances as a result of the losses sustained from their client’s positions. A multitude of firms such as Alpari UK, Boston Prime, Excel Markets and Liquid Markets became insolvent, just to name a few.
The brokerage houses that collapsed caused the most financial ruin because they acted as an intermediary for their clients to the markets (liquidity providers). The brokers all collected their client’s deposits and used them as collateral with their Prime Broker to secure liquidity. As you know, when a broker fails to maintain a sufficient capital position to cover every dollar that their clients have on deposit they are in breach of regulations and are forced into liquidation.
The CHF movement, as a result of the SNB’s actions, resulted in negative balances in a significant number of the brokerages client accounts (meaning the clients had open position losses that were greater than the amount they deposited once the positions were liquidated). This in turn resulted in losses in the brokers collateral accounts with their Prime Brokers. When those brokers were forced to shut down, because they no longer had the funds to cover their client liabilities, they were only able to return pennies on the dollar.
For brokers, fund managers and individuals who are seeking deposit protection against the risk of their broker becoming insolvent and only getting back pennies on the dollar, I strongly recommend opening a custodial account (through Tri-Party Credit agreement) A custodial account is essentially a financial escrow account established in the client’s name and administered by a responsible person or entity, known as a custodian, who has a fiduciary obligation to the beneficiary.
For qualified counterparties, this offers a secure client funds solution through a deposit or custodial bank account. In this structure, a deposit or custody account is opened in Client’s name and maintained for the benefit of the client. The account operates under a tripartite agreement between the client, depository or custodial bank and broker. Under the terms of the agreement, the broker is authorized to debit or credit the account for trading gains or losses within 24 hours of the close of the trading day (or next business day).
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For qualified counterparties, Advanced Markets, in conjunction with Macquarie Bank and Deutsche Bank National Trust Company, offers a secure client funds solution through a deposit or custody bank account. Your eligibility will be determined based on your account application. Please note that in order to establish a tripartite account the minimum deposit required is USD 250,000. As there are a number of factors involved in establishing one of these accounts, it takes approximately 2-6 weeks to complete the process.
What are the benefits of having a tripartite account?
1) Protection in unforeseen events – The account adds protections to the money of the account holder in the unforeseen event that their broker becomes insolvent.
2) Real segregation of funds – All client equity is secure and fully segregated at all times in the Client’s name and the client funds are not co-mingled with the broker’s funds or those of any other client. The money is held by an independent custodian Trustee or Bank, who administers the assets for the protection of the client.
3) Marketing advantage – Security of funds is of paramount concern to clients, especially in light of recent events. Clients are electing to work with the institutions offering the maximum security for the funds on deposit in their account.
Had Tripartite accounts been offered and the clients took advantage of using this type of secured funds strategy while trading at any of the brokers that became insolvent during the Janaury 15, 2015 CHF event, their deposits would have remain untouched as a result of the brokers’ losses and they would have maintained 100% of their money due the day the doors closed.