Legal standards for FX prime brokers

The Financial Markets Lawyers Group (FMLG), an industry body consisting of leading counsels of top international banks, is currently working on a master give-up agreement between prime brokers and dealers that will cover as many provisions as possible, said Robert Spielman, director and senior counsel at Deutsche Bank in New York. "It indicates what one has to do in terms of creating an accepted transaction."

The provisions covered in the master agreement, due to be completed in March, include setting out circumstances under which a prime broker would accept the give-up of a trade done by a client with a dealer. For example, it would set limits on transaction types such as spot, forwards and options; tenor; and specifications for credit limits on the transactions, such as a net daily settlement limit and a net open position limit.

The standard also contains provisions regarding exercise of options where in some situations parties might not want the exercise notices to be sent directly from the dealer to the client and the prime broker. The normal provisions on representations and warranties containing provisions on how the agreement can be terminated are also included, said Spielman.

These limits would typically be set by the prime broker, and in some cases by negotiations between the parties.

The standards allow some leeway where opinions on how to approach certain provisions differed in the formulation process. "We feel we’ve standardised a great deal of the documents but given some flexibility to participants with respect to issues within a single market practice," said Spielman. There will be one overall agreement that is signed and a separate give-up agreement notice for each client.

While the standards are not obligatory for the industry, Spielman expects many if not most prime brokers will adopt the standards for their FX business. He added, however, that he does not expect prime brokers to reject give-up counterparties that refuse to adopt the standards. "Prime brokers and dealers have always been able to work out successful give-up arrangements between themselves. There are often negotiations and there may well be in this case as well," he said. "I don’t think it will in any way prevent business from being done."

New entrants into the area such as Wachovia Bank are planning to align themselves under the new standards. The bank, which has already begun acting as a give-up counterparty for the hedge fund and brokerage clients of a "leading prime broker", is looking to adopt the new standards to hold it in better stead, said Tim Holder, director in the global rates division at the US bank in London.

"Everyone is struggling with the fact that each institution has a different administration process, and if you can streamline this you make it easy for the prime broker. And whatever is easy for the prime broker will then put you in a more favourable position as a give-up counterparty," he said.

Spielman said that while the standard is currently being drafted so that it operates under New York law, he expects the standard would have global applicability.