Template:Unallocatedtrades

Asset managers 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 principal whose identity is not disclosed by an agent to a counterparty at the time of transaction is an undisclosed principal.

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.

• 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 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.