The Product

The Investment

Whenever an Investor has decided to invest into a strategy of a Currency Manager, the Investor is investing the agreed amount into an account structure within the Prime Broker. The investment that the Investor places with the Prime Broker is used as collateral against the credit risk that the Prime Broker is facing towards the Investor. Products included in the concept are FX spot, FX forwards, FX swaps, Non deliverable forwards and plain vanilla FX options. The Currency Managers might also have the possibility to execute trades on electronic trading platforms.

Trade flow

The flow is to be as follows; the Currency Manager initiates an FX trade towards the Executing Broker. The Currency Manager gives up the trade to the Prime Broker. Simultaneously, the Executing Broker books a trade towards the Prime Broker (sends give up through an electronic give up interface or other acceptable format). Once the trade details have been matched, the Currency Manager through the Prime Broker client interface allocates the trade to the Investor.

Risk methodology

The Currency Manager is given a trading limit by the Prime Broker. The risk methodology of choice for that trading limit is the Net open position methodology. When calculating the net open position you take all positions, net all currencies regardless of settlement date, take all currencies which the Investor owes the Prime Broker and covert into USD value. That amount is the Net open position. The trading will be on non deliverable basis meaning that trades will not actually settle; they will either be closed or rolled over. The closing of a position will be done through doing a mirrored trade as compared to the position which is to be closed out. A roll over is done through a so-called tom next swap which gives the result that the position will be moved to the forward date. Positions that a currency manager wants to keep will be rolled over whilst positions which he wants to be terminated will be closed.

Credit Limits

In FX Managed Accounts, the Net open position structure is defined in the market practice documentation as created by the Financial Markets Lawyers Group. There will be a credit limit based on Net open position which will be the basis for the Prime Brokers credit risk management towards the Investor. A guideline used by Prime Brokers when setting limits is that the Net open position limit in relation to collateral values as posted by the investor is to reflect the overall leverage which is given by the trading pattern of the Currency Manager. This relation is subject to credit approval on a case by case basis. When implementing new Investors the Prime Broker will ask for, among other things, initial margin (the investment), leverage, tenor and currencies to be traded.

Legal documentation

The legal documentation will give the basic structure of the FX Managed Accounts facility. The starting point is the Investment Management Agreement between Currency Manager and Investor. Once that is in place, the Prime Broker is driving the documentation process based upon information from the parties. The Prime Broker is to enter into an ISDA agreement (with CSA if applicable) with the Investor. For each Executing Broker, there will be a Counterparty Notice giving the Currency Manager the right to trade FX on behalf of the Investor with the Prime Broker as clearer.

Confirmations and reporting

The Currency Manager and the Investor will be able to use the Prime Broker trading interface application for intraday reporting and end of day reporting. The Investor can choose to confirm trades himself or the Currency Manager can confirm trades on behalf of the Investor. The information in the Prime Broker client interface can be used by the Investor for trade reconciliation. The Prime Broker has a Prime Brokerage service desk with 24 hour service Monday to Friday. If there is problem with a trade either the Currency Manager or the Investor can call there. As the facility is on a discretionary basis, the main rule is that the Currency Manager will try to solve any outstanding problem directly with the Prime Broker.