How to read a liquidity agreement: the ten clauses that decide the relationship

First of all: this is not legal advice, and it's no substitute for a lawyer. It's the list of clauses that, in practice, generate most of the conflicts in an execution relationship — so you know what to look at and what to ask before the document reaches your adviser. Make the decisions about the contract with them.

Almost nobody reads these agreements carefully until there's a problem. By then, the clause that matters is already signed and the terms are set by the other party.

These are the ten that most often end up at the center of the argument.

1. Unilateral modification of terms

What to look for: a clause that lets the counterparty change spreads, commissions, margins or execution policy with little or no notice.

It's the most common and the most costly. It's usually drafted innocuously: "the Company may modify the commercial terms upon notice to the Client." The question is how much notice and whether you can exit without penalty if you don't accept.

Ask: how many days' notice? Can I terminate without penalty if I don't accept the change?

2. Definition of prohibited flow

What to look for: how the trading behavior that can trigger consequences is defined.

This is where the toxic flow problem lives. A vague definition — "abusive strategies," "practices the Company deems harmful" — leaves the classification entirely in the other party's hands, with no verifiable criterion.

A useful definition is specific and measurable: it describes concrete patterns, not value judgments.

Ask: which concrete patterns, measured how? Will you show me the data you used to reach that conclusion?

3. Consequences and their gradation

What to look for: what happens exactly when they detect something, and in what order.

There's a huge difference between "the Company may close the account" and a documented escalation: warning → conversation → routing change → termination. The second gives you time to react; the first leaves you without an operation overnight.

Ask: is there gradation? With how much notice at each step?

4. Termination and its timelines

What to look for: how much notice each party has, and whether it's symmetric.

It's common to find 90 days' notice for the client and 30 — or immediate "for cause" — for the provider. That asymmetry, combined with a vague definition of "cause" (clause 2), leaves you exposed.

Ask: is the notice symmetric? What exactly constitutes "cause"?

5. What happens to open positions

What to look for: the treatment of your live book if the relationship ends.

If they close your account with open positions, are they liquidated at market, transferred, do you have a window to close them in an orderly way? The answer can be worth a fair amount of money in a stressed moment.

Ask: do I have an orderly liquidation period? At what price are they closed if not?

6. Funds: segregation and priority

What to look for: where your funds are held, whether they're segregated, and what happens in the event of the counterparty's insolvency.

Segregation isn't a detail: it determines whether your funds are a separate asset or part of the insolvency estate if the counterparty goes under. The clause should name the custodian bank or at least its category.

Ask: segregated at which bank? How often are they reconciled?

7. Limits of liability

What to look for: the counterparty's liability cap and what's excluded.

It's normal for there to be limits. What's worth reviewing is whether they exclude damages arising from failures of their own infrastructure — because then a prolonged outage in a moment of volatility is entirely your problem.

Ask: does the exclusion also cover system failures attributable to you?

8. Ownership and use of your data

What to look for: who owns your flow data and what they can do with it.

Your aggregated flow is commercially valuable information: it reveals your clients' behavior and your patterns. A clause that allows using that data "for analytical and service-improvement purposes" can be innocuous or it can mean they feed models later used against you.

Ask: can you use my flow data for anything other than providing me the service? Is it shared with third parties?

9. Scope of the counterparty's license

What to look for: which activity the counterparty is legally authorized to provide you.

This is the one almost nobody looks at and the one that can invalidate the entire structure. An entity authorized as an intermediary in the execution of transactions for clients can execute your orders. That same entity may not be permitted to supply you a wholesale feed for you to run your own book: in several jurisdictions that activity requires another license.

You can sign a flawless contract with a flawlessly regulated entity and still be contracting something its license doesn't cover.

Ask: license number and category, and in which public register can I verify it myself?

10. Governing law and dispute resolution

What to look for: which jurisdiction governs and where conflicts are resolved.

An agreement governed by the law of a distant jurisdiction, with arbitration in a third, can make claiming economically unviable even when you're in the right. It isn't always negotiable, but you should know the cost before signing, not after.

Ask: arbitration or courts? Where and at what estimated cost?

The red flags

If these appear, it's worth going slowly:

Vague definitions of prohibited behavior combined with immediate termination
Unilateral modification without notice or right of exit
Strong asymmetry in termination timelines
A total absence of any mention of fund segregation
Refusal to identify the license or to tell you where to verify it
Broad use of your data with no limit of purpose

None is necessarily disqualifying on its own. All together they describe a relationship where you take the risk and the other party keeps the discretion.

How to take it to your lawyer

Your legal adviser knows contracts; they probably don't know FX market microstructure. The way to make the most of their time is to give them context on what matters operationally:

Flag clauses 1, 2, 3 and 4 as priorities — they're the ones that generate real conflicts
Explain what Last-Look is and why the execution clause matters
Specifically ask them to review the termination symmetry and the definition of "cause"
Have them verify the license clause against the regulator's public register

A lawyer with that context gives you a far more useful review than one who only sees a standard commercial contract.

Frequently asked questions

Can these agreements be negotiated? At the institutional level, a good deal more than people assume. The notice timelines, the gradation of consequences and the definition of prohibited flow are usually negotiable. That they present the document as immovable is itself a signal.

What if I already signed a bad one? First review the termination clause: how much notice you need and what penalty there is. With that you know your exit cost, which is the only real lever. Then pursue renegotiation at the next anniversary or when you increase volume.

Is a short agreement a better sign than a long one? Not necessarily, and sometimes it's worse: very brief agreements tend to leave undefined precisely what gets disputed later. What matters isn't the length but whether the critical clauses are defined in a verifiable way.

Should I ask for a trial period? Yes, and reasonably it should exist without your having to ask. A production-parity sandbox with credentials before the commercial commitment serves that function better than any clause.

Related: LP, prime broker and prime of prime to understand what type of entity you're signing with, and how a broker chooses liquidity for the prior evaluation framework.

Our license details and the link to the FSC's public register — point 9 of this list — are in legal information, together with the license conditions reproduced in full.