Client’s best interest rule: Difference between revisions

Client’s best interest rule (view source)

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 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, 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.
+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. So if these reasons ''do'' trump an incoming client’s request to trade, then it stands to reason that the [[dealer]]’s own interest takes precedent over the (putative) client’s interest. If so, this is a either a transgression of the client’s best interest rule, or a situation in which the client’s interest doesn’t prevail. The [[JC]] says it is ''obviously'' the latter.
-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.
+====And client means?====
+So, then when this rule says “client” what does it mean? Any person whom the [[dealer]] has [[Onboarding|onboarded]] as a client who has at any time traded any product, ever, or a live [[client]] with an ''actual'' [[exposure]] to the specific product in question? If you take the wider view — and a [[chicken licken]] will be [[inclined]] to, since that’s the least likely to get him skewered — then any onboarded entity acquires some (conditional?) right to be offered a trading line in ''this'' product over any other participant in the market who hasn’t yet been onboarded — remember “''[[a stranger is just a client you haven’t onboarded yet]]''” — and that inequity seems just as arbitrary as one between a client who ''is'' in the product against one who is not.
+When you back out of that ''cul-de-sac'', there is only one conclusion left: the [[dealer]]’s decision to deal in a product ''must'' be its own sovereign right. [[TCF]] must be about fair treatment of customers the [[dealer]] ''has'' traded with, not with randoms (whether onboarded or not) with whom it ''hasn’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.
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