Discretion: Difference between revisions

A as well as lending on margin, a [[prime broker]] runs banking services for its customers, who may hold deposit cash with the prime broker in excess of its contractual margin requirement. As with any other deposit accounts, the client may ask for its money — in excess of its margin requirement — back at any time. To allow a degree of flexibility, prime brokers do not tend to agree time frames within which they must return money, but by unerring practice it tends to be same day, as long as the request comes in early enough.

Sometimes more petulant clients ask for a ''commitment'' to return same day; to which the prime broker’s response is, okay, as long as you commit to make your request by ten o’clock in the morning, I will commit to returning it same day.

Notice the flexibility the parties otherwise have is just being slightly eroded. You would think in an environment of trust and good faith you wouldn’t normally like to erode one’s discretions, but prime broking is not always such a place of warmth, sweetness and light.

Now once upon a time one such client rolled up one day to a prime broker, at ten minutes past the agreed deadline for a withdrawal request, and asked for its money back. The prime broker ran its checks, cleared all balances, checked its margin levels and disbursed the money, exactly as you would expect a good banker to do.

Alas, that was the day in March 2021 on which a peculiar corner of the market melted down taking that prime brokerage client and all its positions, across six prime brokers, with it. The awful lot of money that prime broker lost that day would have been an awful lot less had it not paid out that money.

Now, to be clear: our [[prime broker]] ''had'' been remiss in its business management: it had failed to see the incipient risk presented to this client by its positions in that peculiar corner of the market. But that was a completely different business failing. In honouring the withdrawal request, it got things absolutely right. Had the ''failing'' bit of the risk management operation been on the job, it would have stopped the disbursement. But it did not.  

When it came to the inevitable recriminations, the bank’s crack, rear-mounted hindsight division — internal audit, compliance, business management — rolled in. They found the client’s contract, that 10.00am deadline, which they noted had passed. They asked one question: why was no-one monitoring our legal rights? Why did we pay out when we were not obliged to?

And who do you think they fired?