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 liable as a [[principal]] 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 most relevant in the context of [[agency]] orders for [[securities]] and [[derivatives]] placed with a [[broker-dealer]] by an [[asset manager]] in bulk on behalf of several clients. Typically the [[agent]] will place the order first, and advise the [[executing broker]] of the identity of the [[principal]]s to whom the securities should be allocated later in the day. [[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 on behalf of their clients.


A [[principal]] whose identity is not disclosed by an [[agent]] to a counterparty at the time of transaction is an [[undisclosed principal]].  
The question arises: who is liable for those executed transactions ''in the mean time''? The [[broker]] doesn't know who the [[principal]] is, so 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.


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.
So much bunk — all of these reasons. The [[manager]] is the agent chose not to disclose its [[principal]]. By doing so it accepted unconditional responsibility for settling its client’s transaction.
*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:
**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 />

Revision as of 16:25, 2 November 2016

A legal conundrum most relevant in the context of agency orders for securities and derivatives placed with a broker-dealer by an asset manager in bulk on behalf of several clients. Typically the agent will place the order first, and advise the executing broker of the identity of the principals to whom the securities should be allocated 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 on behalf of their clients.

The question arises: who is liable for those executed transactions in the mean time? The broker doesn't know who the principal is, so 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.

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

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