Monday, April 6, 2009
Regulators Provide "Tips" for Broker-Dealers on Avoiding Failures to Deliver Securities
Regulators Provide "Tips" for Broker-Dealers on Avoiding Failures to Deliver Securities
Last updated on 11/25/08
The Staff of the SEC's Division of Trading and Markets and the Office of Compliance Inspections and Examinations, along with FINRA and NYSER, are providing the following information to assist broker-dealer firms in preventing failures to deliver securities. Firms conducting short sales are encouraged to consider practices to prevent delivery failures, including, for example:
Borrowing. Borrowing and obtaining control of the securities before settlement, rather than entering into an agreement to borrow such securities. One firm, for example, has indicated that it has made a practice of borrowing or maintaining adequate inventory to allow it to deliver securities by settlement date and thereby prevent a fail to deliver in that security.
Arrangement to borrow. Entering into a bona fide agreement to borrow securities, especially in transactions in hard-to-borrow securities, in order to ensure that the firm will be able to settle the transaction on T + 3. This practice provides assurance that the shares will be available upon settlement and that the trade will not fail.
Earmarking. If the firm enters into an arrangement to pre-borrow shares without obtaining control, determining that the source of shares for the pre-borrow will be available on T + 3. Shares may be specifically earmarked for each arrangement to borrow.
Maintaining an inventory. Maintaining adequate inventory of securities in which the firm frequently executes short sales sufficient to cover anticipated short sales and to cover any pre-borrows granted by the firm. Reducing the shares available from inventory in order to ensure that adequate shares are available to deliver by settlement date.
In addition, firms are reminded of their obligations under Regulation SHO, as amended by Rule 204T, regarding documentation and monitoring of sources of shares.
Documenting the source of shares. In instances where a customer relies on a broker-dealer other than the executing broker-dealer to settle a transaction, the broker-dealer that settles the customer's transaction must document the source of the customer's locate or pre-borrow. Additionally, the executing broker-dealer must have adequate controls in place to ensure that locates or pre-borrow arrangements provided by the customer are valid. In addition, executing broker-dealers are reminded that when a customer provides assurance that it has access to shares to settle their transaction, the executing broker-dealer is required to document the source of the customer's locate or pre-borrow.
Monitoring locates. Regulation SHO, as amended by Rule 204T, requires firms to actively monitor the performance of locates or pre-borrows, including locates or pre-borrows provided by customers, to assess future reliability.
Direct market access/sponsored access. Firms should consider whether their policies and procedures regarding short sales entered via direct market access or sponsored participant arrangements are in compliance with Regulation SHO, as amended by Rule 204T. For example, firms must, at a minimum, document the source of located or pre-borrowed shares when a short sale transaction is entered via a direct market access and/or other sponsored access arrangements.
Finally, firms should work with institutional clients to encourage the development of efficient systems for confirmation and affirmation of trades, to assure timely delivery of DVP trades.
Firms are reminded that they must maintain adequate surveillances and written supervisory procedures to detect manipulative short selling activity and activity that is violative of the Commission's rules.
These "tips" are intended to assist broker-dealer firms in establishing policies and procedures and controls to avoid failures to deliver. Regulators will also monitor for compliance with the SEC's rules to protect investors against naked short selling abuses.
Last updated on 11/25/08
The Staff of the SEC's Division of Trading and Markets and the Office of Compliance Inspections and Examinations, along with FINRA and NYSER, are providing the following information to assist broker-dealer firms in preventing failures to deliver securities. Firms conducting short sales are encouraged to consider practices to prevent delivery failures, including, for example:
Borrowing. Borrowing and obtaining control of the securities before settlement, rather than entering into an agreement to borrow such securities. One firm, for example, has indicated that it has made a practice of borrowing or maintaining adequate inventory to allow it to deliver securities by settlement date and thereby prevent a fail to deliver in that security.
Arrangement to borrow. Entering into a bona fide agreement to borrow securities, especially in transactions in hard-to-borrow securities, in order to ensure that the firm will be able to settle the transaction on T + 3. This practice provides assurance that the shares will be available upon settlement and that the trade will not fail.
Earmarking. If the firm enters into an arrangement to pre-borrow shares without obtaining control, determining that the source of shares for the pre-borrow will be available on T + 3. Shares may be specifically earmarked for each arrangement to borrow.
Maintaining an inventory. Maintaining adequate inventory of securities in which the firm frequently executes short sales sufficient to cover anticipated short sales and to cover any pre-borrows granted by the firm. Reducing the shares available from inventory in order to ensure that adequate shares are available to deliver by settlement date.
In addition, firms are reminded of their obligations under Regulation SHO, as amended by Rule 204T, regarding documentation and monitoring of sources of shares.
Documenting the source of shares. In instances where a customer relies on a broker-dealer other than the executing broker-dealer to settle a transaction, the broker-dealer that settles the customer's transaction must document the source of the customer's locate or pre-borrow. Additionally, the executing broker-dealer must have adequate controls in place to ensure that locates or pre-borrow arrangements provided by the customer are valid. In addition, executing broker-dealers are reminded that when a customer provides assurance that it has access to shares to settle their transaction, the executing broker-dealer is required to document the source of the customer's locate or pre-borrow.
Monitoring locates. Regulation SHO, as amended by Rule 204T, requires firms to actively monitor the performance of locates or pre-borrows, including locates or pre-borrows provided by customers, to assess future reliability.
Direct market access/sponsored access. Firms should consider whether their policies and procedures regarding short sales entered via direct market access or sponsored participant arrangements are in compliance with Regulation SHO, as amended by Rule 204T. For example, firms must, at a minimum, document the source of located or pre-borrowed shares when a short sale transaction is entered via a direct market access and/or other sponsored access arrangements.
Finally, firms should work with institutional clients to encourage the development of efficient systems for confirmation and affirmation of trades, to assure timely delivery of DVP trades.
Firms are reminded that they must maintain adequate surveillances and written supervisory procedures to detect manipulative short selling activity and activity that is violative of the Commission's rules.
These "tips" are intended to assist broker-dealer firms in establishing policies and procedures and controls to avoid failures to deliver. Regulators will also monitor for compliance with the SEC's rules to protect investors against naked short selling abuses.
Thursday, April 2, 2009
More definitions around broker
- Inter-dealer Broker
- Primary Dealer- Investopedia Wikipedia
- Principal Orders - Investopedia
- Contra Broker - Investopedia
- Two Dollar Broker - Investopedia
- Executing Broker - Investopedia
- Discount Broker - Investopedia
- full Service Broker - Investopedia
- Inter-positioning - Investopedia
- Give up - Investopedia
- Selling Away - Investopedia
- Wire House Broker - Investopedia
Broker Dealer Regularization (Investopedia)
This article is an apt place to understand in detail about Broker and a dealer. This lists in detail about the following topics :-
1. Introduction
- Definition
- Exclusions in definitions
- Initial Registration of Broker-dealers
- Initial Financial Requirements - Surety Bonds
- Fees
- Testing
- Update
- Renewal
- Termination
This article is written keeping US pespective in mind.
Wednesday, April 1, 2009
Technology, Uncle Sam challenge prime brokers: UBS
By Joseph A. Giannone
NEW YORK (Reuters) - Wall Street's prime brokers, abandoned by their anxious hedge-fund customers last fall, face more challenges from new technology and the U.S. government's plan to step in as a lender of last resort, UBS's head of global prime services, Alex Ehrlich, said on Monday.
The long-standing domination of the prime brokerage business by Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Bear Stearns was toppled last year as worries about the credit crunch and the stability of brokers led hundreds of fund managers to move business to banks with better credit.
Looking ahead, the Big Three likely have been unseated for good, as competitors introduce the same kind of technology that Apple's (AAPL.O: Quote, Profile, Research, Stock Buzz) iTunes used to supplant the record companies, Ehrlich said.
"If I were running a hedge fund, I'd be looking at all the banks and wondering what my best funding solution was," Ehrlich said at the Reuters Private Equity and Hedge Fund Summit. "The industry has never been more ripe for Steve Jobs-like innovation."
Ehrlich declined to elaborate on how UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) would deliver new technology, but he indicated the answer involved unbundling the financing and other services a prime broker provides.
"Banks are all so focused on their balance sheets, that you think if someone comes along with a pure funding model, it could disrupt the prime brokerage model," he said.
MARKET SHARE
As much as half of all prime brokerage market share moved around to new providers last year when the collapse of Lehman Brothers in September sparked a run on other broker-dealers. UBS gained market share, though its business also has been hurt by the contraction of the hedge fund industry.
"Prime brokers learned some powerful lessons" last year, said Ehrlich, who ran Goldman's prime brokerage before joining UBS in 2003. Among them, "the stability of funding coming from banks wasn't as ironclad as history had taught."
The big broker-dealers have stabilized since last fall, but they are now focused intently on using capital carefully and seeking the highest returns. Some prime brokerage activities have been cut back as a result.
And while the collapse of Long-Term Capital Management in 1998 taught firms to seek more stable sources of funds, "what people learned in 2008 was that they hadn't gone far enough," he said.
UBS was a net gainer of hedge fund market share, he said. "We lost nearly no business and won some business."
That said, all the bank prime brokers may have been superseded by an even bigger competitor: the U.S. government. As part of the Treasury Department's plan to revive banks and remove toxic assets from the system, Secretary Tim Geithner laid out plans on Monday to provide funding to large hedge funds that agree to purchase these assets.
"To a degree (the government) will be a competitor," he said. "I'd love to step into that gap, but as public companies, not many banks could afford to take that risk," he said.
NEW YORK (Reuters) - Wall Street's prime brokers, abandoned by their anxious hedge-fund customers last fall, face more challenges from new technology and the U.S. government's plan to step in as a lender of last resort, UBS's head of global prime services, Alex Ehrlich, said on Monday.
The long-standing domination of the prime brokerage business by Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Bear Stearns was toppled last year as worries about the credit crunch and the stability of brokers led hundreds of fund managers to move business to banks with better credit.
Looking ahead, the Big Three likely have been unseated for good, as competitors introduce the same kind of technology that Apple's (AAPL.O: Quote, Profile, Research, Stock Buzz) iTunes used to supplant the record companies, Ehrlich said.
"If I were running a hedge fund, I'd be looking at all the banks and wondering what my best funding solution was," Ehrlich said at the Reuters Private Equity and Hedge Fund Summit. "The industry has never been more ripe for Steve Jobs-like innovation."
Ehrlich declined to elaborate on how UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) would deliver new technology, but he indicated the answer involved unbundling the financing and other services a prime broker provides.
"Banks are all so focused on their balance sheets, that you think if someone comes along with a pure funding model, it could disrupt the prime brokerage model," he said.
MARKET SHARE
As much as half of all prime brokerage market share moved around to new providers last year when the collapse of Lehman Brothers in September sparked a run on other broker-dealers. UBS gained market share, though its business also has been hurt by the contraction of the hedge fund industry.
"Prime brokers learned some powerful lessons" last year, said Ehrlich, who ran Goldman's prime brokerage before joining UBS in 2003. Among them, "the stability of funding coming from banks wasn't as ironclad as history had taught."
The big broker-dealers have stabilized since last fall, but they are now focused intently on using capital carefully and seeking the highest returns. Some prime brokerage activities have been cut back as a result.
And while the collapse of Long-Term Capital Management in 1998 taught firms to seek more stable sources of funds, "what people learned in 2008 was that they hadn't gone far enough," he said.
UBS was a net gainer of hedge fund market share, he said. "We lost nearly no business and won some business."
That said, all the bank prime brokers may have been superseded by an even bigger competitor: the U.S. government. As part of the Treasury Department's plan to revive banks and remove toxic assets from the system, Secretary Tim Geithner laid out plans on Monday to provide funding to large hedge funds that agree to purchase these assets.
"To a degree (the government) will be a competitor," he said. "I'd love to step into that gap, but as public companies, not many banks could afford to take that risk," he said.
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Broker Dealer operations - wikipedia
This is what broker dealer means - http://en.wikipedia.org/wiki/Broker-dealer (source Wikipedia)
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