Foreign Exchange Prime Brokerage is a service offered by hedge funds, investment companies, commodity consultants and other investment and trading groups in large foreign exchange transactions. The concept of prime brokerage began in the equity and bond markets; The prime brokerage idea was adapted to the foreign exchange world in the early 1990s and has since become a standard in the industry, particularly for hedge funds and investment firms. Margin transfer timing. A model PBA generally finds that a sufficient margin should always be maintained in the account. If a manager does not overfinance a PB account, this is not possible in practice. It is customary for managers to be booked a 10 a.m. cut-off time for the same day margin. Timing must be consistent with a manager`s operating processes. In the absence of a negotiated margin transfer timing, the fund may miss a margin call and be excessively late. Also note that PBAs give PB extensive and discretionary default rights to the Fund. If the PB defaults the fund, the show is over. Not only will LA PB liquidate the fund`s assets, but the effects of this default can also have a cascading effect of defaults on the Fund`s other trade agreements (for example. B, other PBAs with other companies, ISDA, Repo, Futures Clearing, etc.).
The reason for this cascading effect is that most trade agreements contain a default provision that indicates that a standard in another agreement is also considered the norm under that agreement. As soon as a default occurs, the PB will have extensive powers to liquidate a fund`s portfolio. Here are some important points to consider to mitigate how and when this liquidation occurs: fish or cut-Bait. As the name rightly suggests, this type of provision is intended to induce the PB to respond to an EoD or to waive its rights. This is a provision that a manager of his PBA must add to protect the fund. Surprising as it may seem, the PBA model is structured in such a way that when an EoD occurs today, the PB can trigger (i.e. default the fund) at any time they choose, even far into the future. For obvious reasons, an executive does not want an EoD to be suspended over the fund and will permanently threaten the fund`s downfall.
The Fish or Cut-Bait provision generally provides that the PB has 30 to 90 days to respond to an EoD before the PB has waived its EoD rights.  For example, a hedge fund can borrow $80 million with a margin request of $20 million for a total of $100 million. But the PB can force the manager to lay more money by increasing the margin requirement. In the example above, pb could instead charge $40 million in margin, which would allow it to have $60 million and $40 million in margin. As the example shows, a higher margin requirement limits the solvency of a fund. However, even if you are not the most attractive pb client, there is a basis of conditions (so-called market standard) that each hedge fund can and should receive from its PB. Acceptance of abandonment is sometimes referred to as give-in. Once a trade is actually executed, it can be called “give-in.” However, the use of the term “give” is much rarer. Under the 2005 ISDA Master Give-Up Agreement, a fund can “abandon” derivatives it negotiated with a broker at its first broker.
He will usually do so because he does not have an ISDA master contract with the broker. Under this agreement, the hedge fund acts at all times as an agent of the first broker (he cannot be at all client of the execution broker) and never creates his own main contract with the execution broker, but simply arranges the contract between the execution broker and the primer. The PB then sets up a back-to-back exchange with hf as part of the ISDA-Master agreement between them. Net result: PB intermediate products between EB and HF. Calling this provision “give-up” is a kind of bad name.