Broker-dealer

An investment firm that acts both as a broker (or agent) when it executes orders on behalf of clients, and also as a dealer (or principal), when it trades for its own account.

The term broker-dealer is used in US securities regulation (and in ISDA netting) parlance to describe stock brokerages, because most of them act as both agents and principals.

Foreign broker-dealers and registered broker-dealers

A foreign broker-dealer (foreign being from the perspective — is there another? — of the United States of America), means that poor, huddled mass of international brokers and dealers who were turned away, or never arrived, at Ellis Island and have not subsequently been registered with the Securities and Exchange Commission. A registered broker-dealer denotes one of those blessed souls who have.

Of much interest to those wanting to handle or “effect” transactions in securities with US persons. The SEC has lots of rules about this, and as you can probably imagine they’re all simple, clear and easy to understand.

See in particular

• Rule 15a-6

Do not confuse with

• Prime broker

Client money and cash brokerage

Should an investment manager ask an executing broker bank to offer it client money protection, consider the following:

• regulated credit institutions (Banks, to you and me) are not required to hold customer cash as client money under the CASS rules (CASS 7.10.16) – banks hold “as banker” and not as trustee for their clients.
• If a bank were to treat cash as client money (it could in theory do this, though it doesn't make a lot of sense):
  • The bank would have to deposit the cash with another bank — in practice a diversified network of them — cue operational mayhem.
  • The client would still, ultimately, be exposed to those other banks, just not the immediate one. Cash is always presents a credit risk to whoever holds it for the time being.
• Brokers generally settle cash equities transactions delivery versus payment under their terms of business. Clients will not pay any money in advance receiving their settlement securities. Therefore the client’s payment obligation is in discharge of its contractual liability to the broker, so is not a “client money” obligation in the first place (see CASS 7.11.25);
• When an investment manager instructs a broker to execute an order for a client it does so as agent for the client, but in the client’s own name.
  • The broker will book the order against the underlying client directly and not against “investment manager as trustee for Client XYZ”.
  • Therefore, at the moment when the investment manager pays the “client money” to the broker, the investment manager ceases to hold it as client money at all, but pays the cash to discharge the client’s obligation to the broker (again, see CASS 7.11.25).