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[[File:TCB.jpg|450px|thumb|center|Taking care of business — I mean treating customers fairly — in Memphis Tennessee]]
[[File:TCB.jpg|450px|thumb|center|Taking care of business — I mean treating customers fairly — in Memphis Tennessee]]
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''See also: European “[[FRANDT]]” regulations requiring [[clearing member]]s to be [[fair, reasonable, non-discriminatory and transparent]] in their dealings with clearing clients, which at first blush seem to qualify some of the bracingly spartan arguments below but, on closer inspection, don’t really.'' <br>
The [[FCA]]’s much-talked-about, seldom understood, [[TCF]] provision. To be read in conjunction with the FCA’s “PRIN” general principles and, for those of you, my pretties, who like to dive ''deeper'', the [https://www.fca.org.uk/publication/feedback/fs19-02.pdf FCA’s discussion paper on conflicts of interest] published in April 2019.
The [[FCA]]’s much-talked-about, seldom understood, [[TCF]] provision. To be read in conjunction with the FCA’s “PRIN” general principles and, for those of you, my pretties, who like to dive ''deeper'', the [https://www.fca.org.uk/publication/feedback/fs19-02.pdf FCA’s discussion paper on conflicts of interest] published in April 2019.


The general principles in play here are:
The [[JC]] has his own [[heuristic]] that gets you to much the same point, and he's translated it into Latin so it doesn’t set off your smut filter: [[non mentula esse]]. But anyway, in the [[FCA]]’s argot the general principles in play here are:
*Principle 2 '''Skill, care and diligence''' – A firm must conduct its business with due skill, care and diligence.
*Principle 2 '''Skill, care and diligence''' – A firm must conduct its business with due skill, care and diligence.
*Principle 6 '''Customers’ interests''' – A firm must pay due regard to the interests of its customers and treat them fairly.
*Principle 6 '''Customers’ interests''' – A firm must pay due regard to the interests of its customers and treat them fairly.
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Secondly, where a [[dealer]] ''has'' offered a product — flakey or otherwise — [[TCF]] is about ''then'' ensuring that the [[dealer]] exercises its rights against clients in that product (''ceteris paribus''<ref>If a client [[Failure to pay|fails to pay]], or can’t meet margin, different story, clearly.</ref>) fairly. So, if you have 100 clients long the same [[delta-one]] [[equity swap]] and there is a [[Market Disruption Event - Equity Derivatives Provision|market disruption]] affecting ''half'' your hedge, you close out ''all'' positions ''pro rata'', rather than closing out the small clients in full and keeping the juicy [[platinum client]] open and therefore happy, however much that is better to your long term revenue profile.
Secondly, where a [[dealer]] ''has'' offered a product — flakey or otherwise — [[TCF]] is about ''then'' ensuring that the [[dealer]] exercises its rights against clients in that product (''ceteris paribus''<ref>If a client [[Failure to pay|fails to pay]], or can’t meet margin, different story, clearly.</ref>) fairly. So, if you have 100 clients long the same [[delta-one]] [[equity swap]] and there is a [[Market Disruption Event - Equity Derivatives Provision|market disruption]] affecting ''half'' your hedge, you close out ''all'' positions ''pro rata'', rather than closing out the small clients in full and keeping the juicy [[platinum client]] open and therefore happy, however much that is better to your long term revenue profile.


Thirdly, trading any products ''necessarily involves taking on risk''. [[Dealer]]s do not have an unlimited tolerance for this stuff. It is axiomatic that [[dealer]]s don’t, without good reason and comprehensive [[verbiage]], grant their clients committed trading facilities. It might attract a [[Regulatory capital|capital charge]] for one thing. Suggesting that, because you have traded with ''one'' client means you are obliged to trade with another, obliges you, effectively to write the whole world a committed trading facility.
Thirdly, trading any products ''necessarily involves taking on risk''. [[Dealer]]s do not have an unlimited tolerance for this stuff. It is axiomatic that [[dealer]]s don’t, without good reason and comprehensive [[verbiage]], grant their clients committed trading facilities. It might attract a [[Regulatory capital|capital charge]] for one thing. Suggesting that, because you have traded with ''one'' client means you are obliged to trade with another, obliges you, effectively to write the whole world a committed trading facility.


So let’s say [[dealer]] A has put on a big trade with client X in the process maxing out its appetite for [[bitcoin]]-denominated cannabis [[futures]]. If client Y comes along and says, “well you did 5 yards with ''him'', so you can do five yards with me too,” it puts our poor risk manager in a pickle. Must she ''double'' her exposure, in the name of treating customers fairly?  Is even ''that'' the end of it? If clients P, Q, and R arrive with the same request the next day, must she quadruple her exposure to suit ''them''? Clearly that would be ''madness''. To take our ''[[reductio ad absurdam]]'' to the other end, we wonder, must our hapless risk manager instead keep some risk headroom open when trading with X, thereby declining to fill the client’s whole order, just so she can keep enough room to accommodate Y, P, Q, and R ''[[pari passu]]'' in case they decide they want to transact? But what of clients A, B,C all the way to ''n''? Clearly this is madness also.
So let’s say [[dealer]] A has put on a big trade with client X in the process maxing out its appetite for [[bitcoin]]-denominated cannabis [[futures]]. If client Y comes along and says, “well you did 5 yards with ''him'', so you can do five yards with me too,” it puts our poor risk manager in a pickle. Must she ''double'' her exposure, in the name of treating customers fairly?  Is even ''that'' the end of it? If clients P, Q, and R arrive with the same request the next day, must she quadruple her exposure to suit ''them''? Clearly that would be ''madness''. To take our ''[[reductio ad absurdam]]'' to the other end, we wonder, must our hapless risk manager instead keep some risk headroom open when trading with X, thereby declining to fill the client’s whole order, just so she can keep enough room to accommodate Y, P, Q, and R ''[[pari passu]]'' in case they decide they want to transact? But what of clients A, B,C all the way to ''n''? Clearly this is madness also.
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So we start to put some parameters on it: a [[dealer]] must have ''legitimate'' grounds for not trading: [[credit]] appetite, [[market risk]], prevailing [[volatility]], reputational and so on, as legitimate grounds. No doubt imaginative risk managers could think of  others. At some point, any old fool can contrive ''some'' plausible excuse for not trading, so in practice we are at the point the [[JC]] started with: ''you don’t have to offer the same product, on the same terms, to everyone''. But this is a bad intellectual ground for getting there. None of these putative grounds have anything to do with “fairness between clients” as such — they all speak to the [[dealer]]’s personal risk appetite. So if these reasons ''do'' trump an incoming client’s request to trade, then it stands to reason that the [[dealer]]’s own interest takes precedent over the (putative) client’s interest. If so, this is a either a transgression of the client’s best interest rule, or a situation in which the client’s interest doesn’t prevail. The [[JC]] says it is ''obviously'' the latter.
So we start to put some parameters on it: a [[dealer]] must have ''legitimate'' grounds for not trading: [[credit]] appetite, [[market risk]], prevailing [[volatility]], reputational and so on, as legitimate grounds. No doubt imaginative risk managers could think of  others. At some point, any old fool can contrive ''some'' plausible excuse for not trading, so in practice we are at the point the [[JC]] started with: ''you don’t have to offer the same product, on the same terms, to everyone''. But this is a bad intellectual ground for getting there. None of these putative grounds have anything to do with “fairness between clients” as such — they all speak to the [[dealer]]’s personal risk appetite. So if these reasons ''do'' trump an incoming client’s request to trade, then it stands to reason that the [[dealer]]’s own interest takes precedent over the (putative) client’s interest. If so, this is a either a transgression of the client’s best interest rule, or a situation in which the client’s interest doesn’t prevail. The [[JC]] says it is ''obviously'' the latter.


====And client means?====
====It isn’t some kind of dealer-based [[doctrine of precedent]].====
So, then when this rule says “client” what does it mean? Any person whom the [[dealer]] has [[Onboarding|onboarded]] as a client who has at any time traded any product, ever, or a live [[client]] with an ''actual'' [[exposure]] to the specific product in question? If you take the wider view — and a [[chicken licken]] will be [[inclined]] to, since that’s the least likely to get him skewered — then any onboarded entity acquires some (conditional?) right to be offered a trading line in ''this'' product over any other participant in the market who hasn’t yet been onboarded — remember “''[[a stranger is just a client you haven’t onboarded yet]]''” — and that inequity seems just as arbitrary as one between a client who ''is'' in the product against one who is not.
The same goes for close-outs and disputes. When presented with any practical means of sorting out a specific dispute on a settlement failure with a client, [[Compliance]] will be sore pressed not to caution ''against'' doing so, again, on grounds it might not be [[treating customers fairly]]: the inequity in question being the resolution of this specific issue to the benefit of one client in a way you might not later offer to another client on another  settlement or trading issue arising in a different market, with a different client at any time, if putatively analogous.
 
Again, this ought not be the purpose of the [[TCF]] rule, if for no other reason it will have a “chilling” effect on a [[dealer]]’s appetite for settling any dispute with any client in any circumstances short of a final judgment of a competent court. Clearly that is not the regulator’s intention — to the contrary, the [[FCA]] has stiffened its expectations on the brisk and handling and resolution of complaints in recent times. [[TCF]] does not introduce the obligation to operate some kind of internal [[stare decisis]] policy, obliging a [[dealer]] to apply a [[doctrine of precedent]], binding it for all times to any practical accommodation it might make with any of its clients at any time for any reason.
 
The intention is surely more limited: if ''two'' clients grumble about the ''same'' valuation the dealer makes on the ''same'' product at the ''same'' time, then a [[dealer]] who fixes the problem for one client should offer a corresponding resolution to the other. Be even handed. Treat your customers fairly. That is all.
 
====And “client” means?====
So, then when this rule says “[[client]]” what does it mean? At first blush you might say this means any person whom the [[dealer]] has [[Onboarding|onboarded]] as a [[client]] who has at any time traded any product, ever, but a better view is that is should be a ''live'' [[client]] with an ''actual'' [[exposure]] to the specific product in question. If you take the former, wider, view — and a [[chicken licken]] will be [[inclined]] to, since that’s the one least likely to get him skewered — then ''any'' onboarded entity acquires some (conditional?) right to be offered a trading line in ''this'' product over any other participant in the market who hasn’t yet been onboarded — remember “''[[a stranger is just a client you haven’t onboarded yet]]''” — and that inequity seems just as arbitrary qnd, really, greater, than one between an existing client who ''is'' in the product at the time of the event, and one who is not.


When you back out of that ''cul-de-sac'', there is only one conclusion left: the [[dealer]]’s decision to deal in a product ''must'' be its own sovereign right. [[TCF]] must be about fair treatment of customers the [[dealer]] ''has'' traded with, not with randoms (whether onboarded or not) with whom it ''hasn’t''.  
When you back out of that ''cul-de-sac'', there is only one conclusion left: the [[dealer]]’s decision to deal in a product ''must'' be its own sovereign right. [[TCF]] must be about fair treatment of customers the [[dealer]] ''has'' traded with, not with randoms (whether onboarded or not) with whom it ''hasn’t''.  
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It is true, Principle 8 extends to conflicts ''between different clients'' as well as between [[dealer]] and [[client]]. But surely these conflicts must arise as a result of some kind of direct interaction between the two clients, rather than the abstract fact that both of them happen to be on the demand side of the same resource for which there is limited supply. Again, regulatory rules here — [[best execution]] — are about the price at which you do trade, if you trade, and not whether you trade at all, and the conflict is between dealer and client and not between the clients.
It is true, Principle 8 extends to conflicts ''between different clients'' as well as between [[dealer]] and [[client]]. But surely these conflicts must arise as a result of some kind of direct interaction between the two clients, rather than the abstract fact that both of them happen to be on the demand side of the same resource for which there is limited supply. Again, regulatory rules here — [[best execution]] — are about the price at which you do trade, if you trade, and not whether you trade at all, and the conflict is between dealer and client and not between the clients.


{{sa}}
*[[FRANDT]]
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