Insurance for corporate investment account

[Nicholas Van Orton]

Hello all,

I have a corporate client who opened an account with the Seychelles branch of a Dubai-based, reputable commodities broker. Established and worldwide renowned firm, but an enviable financial position. They have been testing them out with $3M on account for about a year now and are ready and willing to go 3-4 times that size.

However, they have requested (me) to arrange an insurance policy for them guaranteeing the amount they deposit in case of the broker's insolvency. I have tried to explain that as STP/DMA broker (direct market execution, no market-making risk), they don't have any operational risk, and that by law, their account is kept fully segregated from the broker's own cash. But they are not taking it, and demand that I arrange the aforementioned insurance policy for them. The banking facility (which acts as custodian of funds as well) is located in the UK, where the broker has an omnibus account with the clients' sub-accounts lodged there as well.

The client is willing to pay all underwriting costs and the annual premium that the broker requires. I tried Lloyd's of London Dubai, but since it is the Seychelles arm we're talking about, they could not do the underwriting for this. They have done similar things for UAE brokers, I was told. To be clear, the client wants to have its deposit secured, in case of a broker failure. If they lose money in the market, so be it, they are obviously fine with the risk they are taking.

I'm asking @Martin Everson @Sols @JohnnyDoe and whoever familiar and expert in financialmarkets for help. This is a first for me. My intuition tells me I should speak with either a Seychelles insurance broker who would be willing to underwrite a $10M deposit guarantee, or with the UK, where the bank is located.

Please do let me know if you may be of assistance in the matter.

Thanks.

NVO

NB: If this thread is in the wrong forum, please move it to the appropriate one.

 

[JohnnyDoe]

Nonsense.
Your client should better open with IBKR or any other broker and forget about Seychelles and similar garbage.

 

[Nicholas Van Orton]

Nonsense.
Your client should better open with IBKR or any other broker and forget about Seychelles and similar garbage.

I understand your point, but it's not the case of a single, God-knows-where jurisdiction broker...it's a worldwide broker, regulated in the UK (FCA), Dubai, New Zealand, US, Cyprus/Europe, and some palces in MENA and Africa...cash in hand from operations similar to IBKR, not a small player. Been in the game long enough (Buy and sell side) to know a reputable broker when I see one. That's not the point of my post/thread. I'm looking for an answer to the question the client asked, providing him with a solution. Only that.

NVO

 

[JohnnyDoe]

I understand your point, but it's not the case of a single, God-knows-where jurisdiction broker...it's a worldwide broker, regulated in the UK (FCA), Dubai, New Zealand, US, Cyprus/Europe, and some palces in MENA and Africa...cash in hand from operations similar to IBKR, not a small player. Been in the game long enough (Buy and sell side) to know a reputable broker when I see one. That's not the point of my post/thread. I'm looking for an answer to the question the client asked, providing him with a solution. Only that.

NVO

Refco, Man Financial…

 

[Nicholas Van Orton]

Refco, Man Financial…

Yeah, stop the patronizing replies if you can't provide me with any help. Providing names of firms that commingled clients' funds with their own to speculate and play games is not the same as an execution-only broker, like your beloved IBKR...Again, if you can help, fine...if not, leave it to others to reply.

NVO

 

[JohnnyDoe]

Yeah, stop the patronizing replies if you can't provide me with any help. Providing names of firms that commingled clients' funds with their own to speculate and play games is not the same as an execution-only broker,

Ah right, I forgot that they mentioned this on their websites.
Guess what, I’m on the list of creditors of both. But I was also working on the other side, and I chose to believe everything was fine.

like your beloved IBKR...Again, if you can help, fine...if not, leave it to others to reply.

NVO

Ok, let me elaborate for the perusal of others.

Your rquest demonstrates several fundamental misunderstandings regarding the realities of offshore brokerage insurance. Here's why this proposition is inherently problematic:

First, let's address the elephant in the room: we're dealing with Seychelles. While the parent company's Dubai ( ) presence and UK banking relationships sound impressive (?), they're essentially irrelevant when the operational entity is based in a jurisdiction renowned for its... shall we say... flexible regulatory framework.
Have you ever visited the Seychelles financial regulator HQs?

The request for deposit insurance in this context is rather like requesting earthquake coverage for a house built on an active volcano: technically possible, but no reputable insurer would touch it without charging premiums that would make your eyes water.

The STP/DMA argument, while technically sound for operational risk, completely misses the point regarding jurisdictional risk. While Lloyd's of London usually insure everything from celebrity body parts to alien abductions, if they decline to underwrite something that should probably tell you all you need to know about the risk profile.

Regarding the segregated accounts argument: this is where things get particularly interesting (and by interesting, I mean concerning). Segregation is only as good as the regulatory framework enforcing it. In Seychelles, that's about as reassuring as a paper umbrella in a hurricane.

The UK banking relationship is, frankly, a red herring. Having funds pass through a UK institution doesn't magically grant them UK regulatory protection. That's simply not how jurisdictional authority works in international finance.

The solution here isn't to search for an insurer willing to underwrite this risk: it's to recognize that the very need for such insurance suggests a fundamental flaw in the setup. If the client requires this level of security, they should first consider restructuring their arrangement through a jurisdiction where such protection actually means something.

If anyone is considering suggesting local Seychelles insurers, I recommend to maintain some credibility here.

Some things are uninsurable for good reasons. This is one of them.

 

[Nicholas Van Orton]

Ah right, I forgot that they mentioned this on their websites.
Guess what, I’m on the list of creditors of both. But I was also working on the other side, and I chose to believe everything was fine.

Ok, let me elaborate for the perusal of others.

Your rquest demonstrates several fundamental misunderstandings regarding the realities of offshore brokerage insurance. Here's why this proposition is inherently problematic:

First, let's address the elephant in the room: we're dealing with Seychelles. While the parent company's Dubai ( ) presence and UK banking relationships sound impressive (?), they're essentially irrelevant when the operational entity is based in a jurisdiction renowned for its... shall we say... flexible regulatory framework.
Have you ever visited the Seychelles financial regulator HQs?

The request for deposit insurance in this context is rather like requesting earthquake coverage for a house built on an active volcano: technically possible, but no reputable insurer would touch it without charging premiums that would make your eyes water.

The STP/DMA argument, while technically sound for operational risk, completely misses the point regarding jurisdictional risk. While Lloyd's of London usually insure everything from celebrity body parts to alien abductions, if they decline to underwrite something that should probably tell you all you need to know about the risk profile.

Regarding the segregated accounts argument: this is where things get particularly interesting (and by interesting, I mean concerning). Segregation is only as good as the regulatory framework enforcing it. In Seychelles, that's about as reassuring as a paper umbrella in a hurricane.

The UK banking relationship is, frankly, a red herring. Having funds pass through a UK institution doesn't magically grant them UK regulatory protection. That's simply not how jurisdictional authority works in international finance.

The solution here isn't to search for an insurer willing to underwrite this risk: it's to recognize that the very need for such insurance suggests a fundamental flaw in the setup. If the client requires this level of security, they should first consider restructuring their arrangement through a jurisdiction where such protection actually means something.

If anyone is considering suggesting local Seychelles insurers, I recommend to maintain some credibility here.

Some things are uninsurable for good reasons. This is one of them.

That's a much better answer, thanks. I believe you are right and perhaps it would be best to move to either the Cyprus/UK regulated entity of the company or switch to another firm, like Saxo, Swissquote, IBKR, Flatex, etc. Wouldn't you agree?

NVO

 

[JohnnyDoe]

That's a much better answer, thanks. I believe you are right and perhaps it would be best to move to either the Cyprus/UK regulated entity of the company or switch to another firm, like Saxo, Swissquote, IBKR, Flatex, etc. Wouldn't you agree?

NVO

This would be a better proposition.
Even better would be to operate on a margin basis and put the principal on T-Bills.

 

[Martin Everson]

That's a much better answer, thanks. I believe you are right and perhaps it would be best to move to either the Cyprus/UK regulated entity of the company or switch to another firm, like Saxo, Swissquote, IBKR, Flatex, etc. Wouldn't you agree?

NVO

Not much for me to add here. @JohnnyDoe suggestion of just using IBKR for the amounts your talking about is pretty much it. They are good enough for HSBC UAE who now just offer IBKR accounts to all their client and take a markup. They have thrown in the towel on doing it in-house. I am sure they would have their due diligence on IBKR before doing this partnership.

https://www.hsbc.ae/investments/products/worldtrader/

When you reach large AUM levels [like 9 digits at least] then start looking at prime brokers or hold your portfolio directly via Clearstream or Euroclear etc [depending on instrument] and DFP them in from a broker to take them out of being held in street name with broker.

 

[lagloriacubana]

Same Euroclear holding Russian money hostage?

On a serious note - I saw about HSBC basically white labeling IB and charging a custody fee! What is the advantage of using it through them vs directly?

Edit: I see that updated tariffs on November 13, 2024 show no custody fee anymore. So they have changed it. I guess only benefit is eligibility for premier and instant transfer from account.

 

[Sols]

@JohnnyDoe hit the nail on the head. This is fundamentally flawed/risky and, if the risk of the funds being uninsured is intolerable, I think the only good, realistic solution is to exit.

Going forto a CySEC licensed entity is a bit better. However, CySEC licenses are often just fronts for offshore licenses or no license. Study any paperwork carefully and retain copies.

 

[Nicholas Van Orton]

Thank you all @Sols @Martin Everson and @JohnnyDoe , I have the picture clear and will relay the advice accordingly. Much appreciated.