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Client’s best interest rule: Difference between revisions
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There is much general lofty aspiration here, but not much by way of flesh on the bones. This, generally, is how the [[JC]] likes regulations — self explanatory, and demanding the application of common sense — but it does lead nervous compliance officers, who, having been beaten and bloodied in the foregoing decade don’t always have much of a conceptualisation of common sense — to adopt a bunker mentality. So a few remarks about what the fairness requirement should not mean. You know how we like disclaimers, folks, and this being turf into which the better angels of [[Magic circle law firm|the professional advisorate]] tend not to rush — consider our disclaimer absolute. Take the following as you find it, and don’t blame me if you wind up in jail. | There is much general lofty aspiration here, but not much by way of flesh on the bones. This, generally, is how the [[JC]] likes regulations — self explanatory, and demanding the application of common sense — but it does lead nervous compliance officers, who, having been beaten and bloodied in the foregoing decade don’t always have much of a conceptualisation of common sense — to adopt a bunker mentality. So a few remarks about what the fairness requirement should not mean. You know how we like disclaimers, folks, and this being turf into which the better angels of [[Magic circle law firm|the professional advisorate]] tend not to rush — consider our disclaimer absolute. Take the following as you find it, and don’t blame me if you wind up in jail. | ||
===== It | ===== It doesn’t mean you have to offer the same product, on the same terms, to everyone. ===== | ||
That would be madness. But you see | That would be madness. But you see this argument advanced: | ||
:“If we offer this groundbreaking product — ''tranched synthetic collateralised emissions credit derivatives, denominated in [[bitcoin]]''<ref>Laugh, but this once happened. Expecting it to be a jaunty icebreaker, the JC once suggested this to a commodity structurer in London — I mean a ''leveraged exposure to hot air'', right? hahaha!!! — But he looked sadly and said, “we tried that but we couldn’t get the rating agencies over the line. Pity; the P&L projections were awesome.”</ref> to one special client, then we will have to offer it to ''everyone'' | :“If we offer this groundbreaking product — ''tranched synthetic collateralised emissions credit derivatives, denominated in [[bitcoin]]''<ref>Laugh, but this once happened. Expecting it to be a jaunty icebreaker, the JC once suggested this to a commodity structurer in London — I mean a ''leveraged exposure to hot air'', right? hahaha!!! — But he looked sadly and said, “we tried that but we couldn’t get the rating agencies over the line. Pity; the P&L projections were awesome.”</ref> to one special client, then we will have to offer it to ''everyone''. This is required by the [[TCF]] rule”. | ||
This ''cannot'' be right. | This ''cannot'' be right. | ||
Firstly, treating customers fairly | Firstly, [[treating customers fairly]] generally tilt towards ''not'' offering them flakey products, rather than ''being forced to''. | ||
Secondly, where | 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 | 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 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? Clearly, ''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 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 one can contrive some excfuse for not trading But note, none of these go to fairness between clients as such — they relate to the [[dealer]]’s risk position, not the client. We are led to one of two | |||