Regarding to Bank Guarantee issue | Forex Factory

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Regarding to Bank Guarantee issue

  • #1
  • First Post: Jul 6, 2007 9:47am Jul 6, 2007 9:47am
Hello everyone:

After doing some research, I found this could be possible if customer's fund excess certain amount, say $250,000. And some swiss broker say their bank could offer BG.
My questions is what's the use of this bank gurantee? it insurace what kind of risk? I am n on legal codes, could anyone here give me some hint.

regards,
Mike
Trading is a business
  • #2
  • Jul 6, 2007 10:00pm Jul 6, 2007 10:00pm
Believe it insures your capital with the broker from a total loss if the broker or bank which the money is put in goes bankrupt or shut down to whatever reasons. For example, if your money is with a Broker ABC and has the working capital deposit in a bank XYZ and if either of them goes under for whatever reason and you have such an insurance then your capital is protected by it and you can recover from the insurance company.

The insurance however will not be against losses caused by your trading.
  • #3
  • Jul 7, 2007 3:14am Jul 7, 2007 3:14am
Sorry, I seems to be confused again.

1, You said "you can recover from the insurance company" in the second paragraph, you mean this bank guarantee is actually issued by an insurance company? If that, why the bank guarantee just involves 3 parties in its agreement: Trader, Broker and the Bank.

2, You said "The insurance however will not be against losses caused by your trading". How to define this condition, I can't see any words in the BG deals with this situation.

Looking forward to further comments.

regards
Mike
Trading is a business
  • #4
  • Jul 8, 2007 6:02am Jul 8, 2007 6:02am
My apologies if I have confused you from my poor explanation. What I meant is that a bank guarantee is like an insurance to protect oneself against a risk. For example, a travel insurance will compensate/cover against any possible loss of your belongings due to mishandling of the airport from theft. A bank guarantee simply means that the bank is going to guarantee the refund of your last known available equity in your account with that broker. The bank guarantee is only to ensure the refund of your trading account from you broker hence it will not refund you for any losses sustained in the course of trading.


Not sure if you can understand me now but here is the following extracted from Investopedia. Blame them if you still can't understand after reading the following :

A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases. Should the bank accept that its customer has sufficient funds or credit to authorize the guarantee, it will approve it. A guarantee is a written contract stating that in the event of the borrower being unable or unwilling to pay the debt with a merchant, the bank will act as a guarantor and pay its client's debt to the merchant.

The initial claim is still settled primarily against the bank's client, and not the bank itself. Should the client default, then the bank agrees in the bank guarantee to pay for its client's debts. This is a type of contingent guarantee.
  • #5
  • Jul 8, 2007 8:16am Jul 8, 2007 8:16am
Thanks for your explaination, I'm really appreciated.

After reading your words, I have come up with another issue: Is the bank willing to offer this bank guarantee upon the request of broker. As far I know, according to NFA's policy, client's funds may not receive the same protections as funds used to margin or guaratee exchange-traded futures and options contracts, which receive a priority in bankruptcy. In other words, if the broker become insolvent, client's claims for amounts deposited or profits earned on transactions, may not receive a priority, clients are just GENERAL CREDITOR. Without priority, client's claims will be paid, along with other GENERAL CREDITOR, from any monies still available after priority claims are paid.

So I am wondering, if bank have clear idea of what's the risk involved in this business, it still has the possiblity for broker to get bank guarantee from bank?

regards,
mike
Trading is a business
  • #6
  • Jul 8, 2007 9:25am Jul 8, 2007 9:25am
Your money stays in your account in your bank and earns interest if placed on time or call deposit.

The bank issues a Guarantee in favour of your broker on your request, based on your funds in your bank account.

The BG serves as your funds in your trading account with your broker, you do not have to send any funds to your broker.

You start trading, if you win so much the better, if you lose money, the broker will ask your bank to send whatever sum of money to him from your bank account.

Bank Guaranty costs money (not a lot) and you cannot touch your funds in the bank as long as the BG is in place.

Advantage: unlimited- if the broker goes down your funds are safe in your bank.

This is normal practice in Switzerland for large amounts of course, in other countries not that normal.
Regards
  • #7
  • Jul 8, 2007 12:45pm Jul 8, 2007 12:45pm
Quoting howard
Your money stays in your account in your bank and earns interest if placed on time or call deposit.

The bank issues a Guarantee in favour of your broker on your request, based on your funds in your bank account.

The BG serves as your funds in your trading account with your broker, you do not have to send any funds to your broker.

You start trading, if you win so much the better, if you lose money, the broker will ask your bank to send whatever sum of money to him from your bank account.

Bank Guaranty costs money (not a lot) and you cannot touch your funds in the bank as long as the BG is in place.

Advantage: unlimited- if the broker goes down your funds are safe in your bank.

This is normal practice in Switzerland for large amounts of course, in other countries not that normal.
This is the correct explanation.
  • #8
  • Jul 8, 2007 4:32pm Jul 8, 2007 4:32pm
Quoting howard
Your money stays in your account in your bank and earns interest if placed on time or call deposit.

The bank issues a Guarantee in favour of your broker on your request, based on your funds in your bank account.

The BG serves as your funds in your trading account with your broker, you do not have to send any funds to your broker.

You start trading, if you win so much the better, if you lose money, the broker will ask your bank to send whatever sum of money to him from your bank account.

Bank Guaranty costs money (not a lot) and you cannot touch your funds in the bank as long as the BG is in place.

Advantage: unlimited- if the broker goes down your funds are safe in your bank.

This is normal practice in Switzerland for large amounts of course, in other countries not that normal.
Great! I am clear, thank you very much!
Trading is a business
  • #9
  • Jul 9, 2007 2:34am Jul 9, 2007 2:34am
Not wanting to confuse the issue here but does....

BG = Letter of Credit ???
  • #10
  • Last Post: Jul 9, 2007 2:49am Jul 9, 2007 2:49am
BG=Bank Guarantee
Trading is a business
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