Escrow accounts: the new face of FXPB?

Citi is enabling FX prime brokerage clients to use third-party escrow accounts for initial margins, in what could mark a shift in the landscape for foreign exchange prime brokerage.

A lack of confidence in bank counterparties has had the undesired affect of some FX prime brokerage clients wanting initial margins held in third-party escrow accounts. According to a market source, large funds have made the request to insure against the risk of joining that lengthy queue to have collateral paid back, if the bank goes bankrupt.

"They want to protect their initial margin from the banks," the source said. "The banks have always determined who they dealt with and credited, and now the big hedge funds and real money accounts are demanding different terms from the banks because of Lehman Brothers going under."

Some buy-side participants have noted that trading on-exchange has become more desirable in the fallout from Lehman Brothers' collapse, where even at a segregated account level it can take around six months to get funds out.

This is not good news for banks that would want to control the initial margin. When they lose control of that, it becomes harder to make aggressive terms for clients. "Plus there's an opportunity on holding the collateral, where maybe you can park it somewhere and make a little haircut on it, and it also helps your balance sheet," the source added.

Citi began enabling this for FX prime brokerage clients six months ago and it is thought that another US bank might be doing the same, although an official at the bank was unaware of it.

But now that Citi has begun offering the service it might be likely that others will have to follow suit. It's also likely that there will be one clear winner - Bank of New York Mellon. "Bank of New York has a big business opportunity here to be able to sign up all these banks," said the source. "Why Bank of New York? Because you tend not to deal with them. They're a big real bank and are probably not going to go under."

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