Client’s best interest rule: Difference between revisions

Client’s best interest rule (view source)

Revision as of 13:38, 7 September 2020

1,194 bytes added , 7 September 2020

no edit summary

Amwelladmin

Bureaucrats, Interface administrators, Administrators

82,882

edits

@@ Line 6: / Line 6: @@
 *Principle 6 '''Customers' interests''' – A firm must pay due regard to the interests of its customers and treat them fairly.
 *Principle 7 '''Communications with clients''' – A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
-*Principle 8 '''Conflicts of interest''' – A firm must manage [[conflicts of interest]] fairly, both between itself and its customers and between a customer and another client.
+*Principle 8 '''[[Conflicts of interest]]''' – A firm must manage [[conflicts of interest]] fairly, both between itself and its customers and between a customer and another client.
 *Principle 9 '''Customers: relationships of trust''' – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
@@ Line 14: / Line 14: @@
 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''. This is required by the [[TCF]] rule”.
+:“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''. We have to treat all our customers fairly, you see”.
 This ''cannot'' be right.
@@ Line 26: / Line 26: @@
 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
+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, any old fool can contrive ''some'' plausible excuse for not trading, so in practice we are at the point the [[JC]] started with: ''you don’t have to offer the same product, on the same terms, to everyone''. But this is a bad intellectual ground for getting there. None of these putative grounds have anything to do with “fairness between clients” as such — they all speak to the [[dealer]]’s personal risk appetite.
+When you back out of that cul-de-sac, you are left with one conclusion: At the end of the day, a [[dealer]]’s decision to deal must be its own sovereign right. [[TCF]] must be about fair treatment of customers the dealer ''has'' traded with, not with random people on the street with whom you haven’t.
+=====But [[conflicts of interest]]=====
+It is true, Principle 8 extends to conflicts ''between different clients'' as well as between [[dealer]] and [[client]]. But surely these conflicts must arise as a result of some kind of direct interaction between the two clients, rather than the abstract fact that both of them happen to be on the demand side of the same resource for which there is limited supply. Again, regulatory rules here — [[best execution]] — are about the price at which you do trade, if you trade, and not whether you trade at all, and the conflict is between dealer and client and not between the clients.
 {{ref}}