“Prime Brokerage Participants should strive to monitor and control trading permissions and credit provision in Real Time at all stages of transactions in a manner consistent with the profile of their activity in the market to reduce risk to all parties.” – Principle 41
Prime Brokerage Participants should strive to develop and/or implement robust control systems that include the timely allocation, monitoring, amendment, and/or termination of credit limits and permissions and adequately manage associated risks.
• Prime Brokerage Clients should strive for Real-Time monitoring of their available lines and permitted transaction types and tenors so that only trades within permitted parameters are executed.
• Executing dealers should strive for Real-Time monitoring of designation limits to validate trade requests prior to execution.
• Prime Brokers should have systems reasonably designed tomonitor trading activity and applicable limits upon receiving Give-Up trades.
• Prime Brokers should be in a position to accept trades in accordance with terms and conditions within Prime Brokerage agreements and designation notices.
• Prime Brokers should have policies and procedures reasonably designed to address limit breach exceptions, limit changes, amendments, and novations.
“What I thought was interesting about the Code’s approach to prime brokerage is that it calls on participants other than the
prime broker to share responsibility for the smooth operational functioning of the PB marketplace,” says Curtis Doty, a banking and finance partner at the law firm, Mayer Brown.
Doty observes that the Code’s definition of “Prime Brokerage Participant” encompasses prime brokers, clients using the services of a prime broker, executing dealers (price makers) and market participants that act as execution intermediaries (such as agents and platforms).
He continues: “Principle 41 adopts a proportionate approach based on the participant’s market profile and tempers its requirements by only calling on executing dealers and clients to ‘strive’ for real time monitoring systems. However, the illustrative
examples are clear in labelling certain practices on the part of these other participants as ‘conduct to be avoided.
“In one of these examples, the client, ‘assumes that the executing dealers are monitoring these limits and does not incorporate pre-trade compliance-checking procedures within its internal processes’. Another example, under Principle 15 (which requires prompt resolution of trade discrepancies), disapproves of clients relinquishing responsibility for resolving trade discrepancies to the Prime Broker when the client and executing dealer know each other’s identity,” he adds.
“PBs are called on to play an educational role in this endeavour,” Doty continues. “In its explanation of Principle 26, which is focused on risk management, the Code encourages PBs to have ongoing dialogue with their clients to underscore expectations regarding appropriate behaviour in the market.” In many respects, Doty explains, existing best practices for PBs largely already embody the Code’s requirements. To the extent that the Code could change the way that FXPB businesses operate, Doty expects that any such changes will be incremental.
One interesting prospect that Doty remarks upon, however, relates to provisions of the Code that are not specific to prime
Principles on transparency regarding the capacity in which a participant is acting (as principal, agent or otherwise) and markups might provide guideposts for PBs to assess their interactions with non-traditional entrants to execution services and might facilitate common approaches to their integration, Doty speculates.