How Prime Brokers Decide to Pull the Plug

The Call That Ends Careers

"The phone rings. It's your prime broker. And you already know why."

Bill Hwang built Archegos into a $36 billion position. Then, in March 2021, his prime brokers made a decision. Within 48 hours, his entire fund was gone — liquidated, assets sold, career destroyed.

Long-Term Capital Management had $125 billion in assets and Nobel laureates on staff. When their PBs pulled the plug in 1998, it nearly collapsed the global financial system.

Every week, less famous funds receive the same call. No headlines. No bailouts. Just a voice on the other end saying: "We're closing your positions."

This is how that decision gets made.

"A prime broker isn't your partner. They're your landlord, your banker, and your executioner — all in one. And when they decide you're done, you're done."

— Former hedge fund COO

The Invisible Tier System

Not all hedge fund clients are equal. Inside every prime brokerage, there's a classification system that determines how much latitude you get before the questions start.

The tier you're in isn't just about AUM — it's about revenue generation, relationship history, and perceived risk. A $2B fund with concentrated positions might be treated worse than a $800M fund with diverse, liquid holdings.

Here's what they don't tell you: During market stress, tier classifications can change overnight. That Platinum relationship you thought you had? If the PB's own risk committee gets nervous, you can find yourself in Standard treatment without warning.

The Trigger Events

Prime brokers don't wake up one day and decide to kill a fund. There are specific triggers that start the escalation process:

The dangerous part isn't any single trigger — it's when they stack. A fund with a margin breach AND concentration AND redemptions is in exponentially more danger than one with just a margin issue.

The 72-Hour Countdown

Once a critical trigger fires, an internal clock starts. This is the typical escalation timeline — though in extreme markets, it can compress to hours.

Inside the Kill Decision Meeting

The room where careers end contains a specific group of people. Understanding who's there tells you how the decision gets made.

The Committee Members:

1. Head of Prime Brokerage Risk
The most powerful voice. They present the exposure numbers and liquidation scenarios. If they say "kill," it almost always happens.

2. Chief Risk Officer (or deputy)
Represents firm-wide risk. Their question: "How does this client's blowup affect our other positions?"

3. Relationship Manager
The only advocate for the client. They fight for extensions, but they're often overruled. Their job is on the line too if the client blows up badly.

4. Legal/Compliance
Ensures the liquidation won't create regulatory issues. Checks documentation and ISDA agreements.

5. Trading Desk Head
Gives reality check on liquidation. "Can we actually sell this? What's the market impact?" Their input determines speed of execution.

"I've been in those rooms. The relationship manager is sweating. Legal is taking notes. And the risk officer is already past the decision — they're thinking about execution timing. The meeting is often just documentation for a conclusion already reached."

— Former Prime Brokerage Executive

The Point of No Return

There's a specific threshold where negotiation ends. Different banks have different numbers, but the logic is consistent:

Above 100% of initial margin: You're fine. Normal relationship.
80-100%: Watch list. RM will "check in" more frequently.
60-80%: Formal margin call. You have 24-48 hours typically.
40-60%: Urgent cure demand. Senior escalation. Extensions unlikely.
Below 40%: Point of no return. Kill decision almost automatic.

Why 40%? Because at that level, if the market moves another 10-15% against you, the PB might not be able to liquidate fast enough to recover their loan. The bank's capital is now at risk — and no relationship survives that math.

The Cross-Collateral Trap

Here's where it gets really dangerous. Most funds don't understand their cross-collateral exposure until it's too late.

When you sign a prime brokerage agreement, you typically grant them the right to apply collateral across all your accounts. This means:

• A margin breach in your equities book can trigger liquidation of your bonds
• A problem in your US account can pull down your London positions
• Securities in one strategy can be seized to cover losses in another

The Archegos disaster illustrated this perfectly. When Goldman started liquidating, it didn't just affect the troubled positions — it triggered cross-default clauses that pulled down everything. The cascade was unstoppable.

The Signals You Can See

You can't sit in the committee meeting. But you can watch for signals that the plug is being pulled:

"You want to know the biggest tell? Watch for sudden, unexplained selling in a fund's known positions across multiple names simultaneously. Humans don't sell like that. Liquidation algorithms do."

— Quantitative trader, systematic fund

The Leverage Equation

Every leveraged trader exists in a simple truth: you don't own your positions — you rent them. And the landlord can evict you with 72 hours notice.

The prime broker relationship isn't a partnership. It's a loan, and like all loans, the lender has the ultimate power. They provided the leverage that let you build your empire. And they can take it away just as fast.

This isn't criticism — it's reality. Understanding this power dynamic doesn't mean avoiding leverage. It means respecting the risks it creates. The best funds maintain buffer capital precisely because they understand what you've just learned: the plug can be pulled at any time, for any reason the PB deems sufficient.

When you see a fund blow up and wonder "why didn't they just hold?" — now you know. They weren't given a choice.