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 />