Template:Unallocatedtrades: Difference between revisions

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[[Asset manager]]s will often proudly declare that they act as [[agent]]: at no time, in no circumstances, can they ever be principally liable for transactions they instruct on behalf of their clients. As a general proposition you can see what they’re trying to say but it isn’t quite that straightforward.
A legal conundrum that arises in the context of bulk [[agency]] orders placed by an [[asset manager]] with a [[broker-dealer]] on behalf of several clients. Typically the [[agent]] will place the order first ''without'' naming the [[principal]]s, only to advise the [[broker]] to which [[principal]]s it should allocate the securities later in the day.


Where the [[manager]] instructs the transaction first and allocates it to a given client later — which is usually how managers like to carry on — this puts a [[dealer]] in an invidious position in between times. For a [[dealer]] cannot reject a trade against the street once it has executed it.  
[[Agent]]s will often proudly declare that at no time, in no circumstances, can they ''ever'' be liable as a [[principal]] for transactions they instruct in this way on behalf of their clients.
*The dealer must carry out the transaction regardless of whether the manager allocates to its client. Therefore the [[dealer]] is exposed to market risk immediately. That market risk is for the manager′s client’s account.  
 
*If the manager has not disclosed the client’s identity to the dealer, as its agent the manager has two options. It can either:
This convenient outlook — I mean, they ''would'' say that, wouldn’t they? — provokes more questions that it answers: if the [[agent]] isn’t responsible for unallocated trades, then, until they’re allocated, ''who'' is? The [[broker]] doesn’t know who the [[principal]] is, so it can hardly take up matters with it directly. On the other hand, [[asset manager]]s will hotly deny any kind of personal liability, appealing to their regulatory status, meagre capitalisation, or sheer importance as a valued client in intimating that this risk ought to be the [[broker]]'s problem.
**Disclose the [[principal]]’s identity (so the dealer can take it up with the principal directly), or
 
**Perform the [[principal]]’s obligations to the dealer on the principal’s behalf, as a good {{tag|agent}} should (whereupon the [[manager]] can settle up with its client later – this is not the [[dealer]]’s concern). This is in fact performance of an agency role, but economically (from the dealer’s perspective) it is identical to a principal obligation.<br />
But denying principal responsibility, in the eyes of the common law, is a rather optimistic disposition. An agent who has not disclosed its principal must perform, unconditionally, on its principal’s behalf. This the agent might not characterise as a principal obligation, but against the rest of the world, it may as well be. The counterparty’s interest is to be paid; it does not care by whom. Nor, under the common law, can agent the shed that responsibility even by naming the principal: the counterparty now has a choice against whom to enforce —- though this the parties may vary by agreement.
 
So much bunk — all of these reasons. The [[manager]], as [[agent]], chose not to disclose its [[principal]]. By doing so it accepted unconditional responsibility for settling its client’s transactions.

Latest revision as of 16:53, 4 March 2019

A legal conundrum that arises in the context of bulk agency orders placed by an asset manager with a broker-dealer on behalf of several clients. Typically the agent will place the order first without naming the principals, only to advise the broker to which principals it should allocate the securities later in the day.

Agents will often proudly declare that at no time, in no circumstances, can they ever be liable as a principal for transactions they instruct in this way on behalf of their clients.

This convenient outlook — I mean, they would say that, wouldn’t they? — provokes more questions that it answers: if the agent isn’t responsible for unallocated trades, then, until they’re allocated, who is? The broker doesn’t know who the principal is, so it can hardly take up matters with it directly. On the other hand, asset managers will hotly deny any kind of personal liability, appealing to their regulatory status, meagre capitalisation, or sheer importance as a valued client in intimating that this risk ought to be the broker's problem.

But denying principal responsibility, in the eyes of the common law, is a rather optimistic disposition. An agent who has not disclosed its principal must perform, unconditionally, on its principal’s behalf. This the agent might not characterise as a principal obligation, but against the rest of the world, it may as well be. The counterparty’s interest is to be paid; it does not care by whom. Nor, under the common law, can agent the shed that responsibility even by naming the principal: the counterparty now has a choice against whom to enforce —- though this the parties may vary by agreement.

So much bunk — all of these reasons. The manager, as agent, chose not to disclose its principal. By doing so it accepted unconditional responsibility for settling its client’s transactions.

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