C3. The Front Office — Dealers and Dealing Practices Flashcards
what is the difference between dealers & brokers
Dealers are people or firms who buy and sell securities for their own account, whether through a broker or otherwise.
A dealer acts as a principal in trading for its own account, as opposed to a broker who acts as an agent who executes orders on behalf of its clients/acting as intermediaries to arrange deals between two parties on agreed terms and receive a brokerage fee for their services.
what is the relationship between a broker and dealer (incl. details on brokerage fee)?
Dealers are employed to deal on behalf of the trading institution. Trading is either direct or through the services of money brokers. They are constantly interacting with the dealers and money brokers of other trading institutions when performing their functions.
Senior management of a trading institution is responsible for the choice of brokers and electronic broking platforms and to ensure that they are authorised by the regulators.
Once chosen, they should establish the terms under which brokerage service is to be rendered and to review it as and when necessary. They should periodically monitor the pattern of broker usage and be alert to possible undue concentration of business. Any freely negotiable brokerage should be agreed only by senior management of both sides and recorded in writing.
what is the other important role of brokers?
They perform another important role as an agent for price discovery in the market by disseminating market information among the interbank participants.
Management of a broking company should impose a ‘best execution’ policy to ensure brokers execute on most favourable terms to the dealers.
what are the procedures when disputes arise between dealer/dealer or dealer/broker?
The involvement of senior management in the early stage of disputes is important, so that disputes can be better dealt with and corrected promptly.
where disputes involve an open/unmatched position, best if position is closed out with agreement from both parties to eliminate the risk of further loss.
market participants don’t benefit from such disputes and all efforts should be made to achieve an equitable resolution.
what is the timing that dealers are allowed to trade?
are they allowed to trade outside of market opening and closing hours?
Dealers are normally bound by the dealing mandate and most of the time dealers are only allowed to deal during the official opening and closing hours.
Where dealers are allowed to cover their risk positions outside of normal trading hours and away from their usual office location, management should explicitly specify the dealers that are authorised to do so, limits and type of permitted products.
it is a good practice to have an in-house agreed close of business for each trading day so that end-of-day positions can be mark-to-market.
what security measures can be put in place to safeguard the dealing room?
Access to the dealing room by non-dealing personnel and external visitors should be controlled in terms of frequency + duration. It is important to have clear and enforceable procedures.
should Developers have restricted and controlled access to production systems?
yes
should the software or applications be tested thoroughly in the development system before installation into the production system?
yes
should users be allowed to change system functionalities?
users should not have access to change system functionalities.
All changes to a system must be approved by the business owner.
can phone conversations and electronic messages by dealers, sales and brokers be recorded?
It is a good practice that all conversations by dealers, sales & brokers should be recorded, including back office telephone lines used by those responsible for confirming deals/passing payments to other institutions.
Institutions should take steps to inform customers that phone or e-messages will be recorded and ensure that they comply with local data protection and secrecy rules.
Based on the MCC, what are the internal policies management must put in place to retain records of the communication?
a) for a minimum period of 7 years;
(b) for a period which reflects the terms and conditions of dealings that have been agreed;
(c) in a manner as to enable the records to be properly audited, whichever is longer.
The accepted practice is for the tapes and other records to be kept for at least 2 months or for a longer period for transactions such as long-term IRS, FRAs and similar instruments, or where there is an outstanding legal proceeding.
when are access to the tape allowed?
access to the tape would only be allowed if there is a dispute.
should you deal with counterparties without full disclosure of the identity of the principals?
Market participants should not deal with counterparties without full disclosure of the identity of the principals.
At the very least, for credit, legal or compliance purposes the counterparty’s identity must be accurately ascertained to prevent the commission of crime.
why does the senior management enforce a minimum period of mandatory holiday each year for the dealer?
to enable the detection of any transactions done by the dealer that may have exceeded the limit, or the dealing authority as approved by the management.
should the counterparty be informed of dealer’s authorisation for transactions and the relevant changes?
yes, it is good practice to inform the counterparty in writing of the dealer’s authorisation and of changes to such authorisation, if any, as soon as practicable.
