Trading broker and clearing broker dealer


Plaintiffs, seeking to maximize their recoveries, are generally inclined to cast a liability net over as many potential wrongdoers trading broker and clearing broker dealer possible. This observation is particularly valid in securities litigation and arbitration where broker-dealers, registered representatives, supervisory personnel, issuers and other parties are routinely joined as a matter of course.

In the context of financially distressed or defunct introducing brokers, the plaintiff's search for the deep pocket frequently brings it to the clearing firm's front door. But is a clearing firm an appropriate liability target? Are clearing firms responsible for the alleged wrongdoings of introducing firms and their representatives? Do some clearing firms create liability for themselves where others do not? Do arbitrators adhere to court-ordained liability standards? Will potential industry rule revisions expand or contract clearing firm liability?

This article generally explores these questions and surveys the current landscape and climate. In a typical securities clearing arrangement, an "introducing broker" formally contracts with a "clearing" or "carrying" broker to complete and settle the securities trades of the introducing broker's customers. The arrangement benefits the introducing broker, which while providing investment advice through direct contact with its investor customers, may not have the financial resources, net capital, personnel or expertise to clear its own trades.

As such, the clearing broker performs numerous back room and administrative functions for the introducing broker, including: The clearing broker typically performs these functions through a "fully disclosed agreement" in which the introducing broker's customer is disclosed to the clearing broker to enable the mailing of trade confirms and account statements.

Clearing arrangements abound within the securities industry. Indeed, they provide a vital resource to many securities dealers who could not otherwise participate in the retail industry. Recent industry statistics reflect that approximately one hundred twenty NYSE clearing firms serve the needs of more than four thousand introducing brokers.

Any views expressed herein do not apply to future cases, which by necessity will turn upon their particular facts and circumstances. Publications Liability Of Trading broker and clearing broker dealer Firms: Traditional and Developing Perspectives By: The Role of Clearing Firms. The Prevailing Legal Standard. Recovery Theories and Illustrative Cases. Liability Under Section 10 b and Rule 10b Former Aiding and Abetting Liability. Controlling Person Liability under Section 20 a.

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Execution is the transaction whereby the seller agrees to sell and the buyer agrees to buy a security in a legally enforceable transaction. Thereafter, all the processes that lead up to settlement is referred to as trading broker and clearing broker dealer, such as recording the transaction. Settlement is the actual exchange of money, or some other value, for the securities.

Clearing is the process of updating the accounts of the trading parties and arranging for the transfer of money and securities. There are 2 types of clearing: In bilateral clearing trading broker and clearing broker dealer, the parties to the transaction undergo the steps legally necessary to settle the transaction. Central clearing uses a third-party — usually a clearinghouse — to clear trades.

Clearinghouses are generally used by the members who own a stake in the clearinghouse. Members are generally broker-dealers. Only members may directly use the services of the clearinghouse; retail customers and other brokerages gain access by having accounts with member firms. The member firms have financial responsibility to the clearinghouse for the transactions that are trading broker and clearing broker dealer.

It is the responsibility of the member firms to ensure that the securities are available for transfer and that sufficient margin is posted or payments are made by the customers of the firms; otherwise, the member firms will have to make up for any shortfalls.

If a member firm becomes financially trading broker and clearing broker dealer, only then will the clearinghouse make up for any shortcomings in the transaction. For transferable securities, the clearinghouse aggregates the trades from each of its members and nets out the transactions for the trading day.

At the end of the trading day, only net payments and securities are exchanged between the members of the clearinghouse. For options and futures and other types of cleared derivatives, the clearinghouse acts as a counterparty to both the buyer and the seller, so that transactions can be guaranteed, thereby virtually eliminating counterparty risk. Additionally, the clearinghouse records all transactions by its members, providing useful statistics, as well as allowing regulatory oversight of the transactions.

Settlement is the actual exchange of money and securities between the parties of a trade on the settlement date after agreeing earlier on the trade. Most settlement of securities trading nowadays is done electronically.

In futuressettlement refers to the mark-to-market of accounts using the final closing price for the day. A futures settlement may result in a margin call if there are insufficient funds to cover the new closing price. Modern day settlement and clearing evolved as a solution to the paper crisis of securities trading as more and more stock and bond certificates were being traded in the 's and 's, and payments were still made with paper checks.

Brokers and dealers either had to use messengers or the mail to send certificates and checks to settle the trades, which posed a huge risk and incurred high transaction costs. At this time, the exchanges closed on Wednesday and took 5 business days to settle trades so that the paperwork could get done.

The 1 st solution to this problem was to hold the certificates at a central depository — sometimes referred to as certificate immobilization —and record change of ownership with a book-entry accounting system that was eventually trading broker and clearing broker dealer electronically.

In Europe, Euroclear and Clearstream are the major central depositories. Trading broker and clearing broker dealer process of eliminating paper certificates entirely is sometimes referred to as dematerialization. A further improvement was multilateral nettingwhich further reduced the number of transactions. Brokers have accounts at central depositories, such as the DTCC, which acts as a counterparty to every trade. So instead of sending payments and securities for each transaction, trades and payments were simply aggregated over the course of the day for each member broker, then were settled at the end of the day by transferring the net difference in securities and funds from 1 account at the depository to another.

For example, if a broker bought shares of Microsoft for a customer and sold 50 shares of Microsoft for another customer, then the broker's net position is the accumulation of 50 shares of Microsoft, which would be recorded at the end of the market day. Likewise, only 50 shares of Microsoft would be transferred to the broker's account, since this is the net difference of buying shares and selling 50 shares. Nowadays, governments around trading broker and clearing broker dealer world are promoting, or even requiring, central clearing, so that they can assess the systemic risk being imposed upon economies by their financial institutions, especially in the trading of derivatives, as was witnessed in the recent credit crisis ofwhen governments had to bail out many financial institutions because of a possible domino effect if a major institution would fail.

Central clearing is the best means of maintaining records so that financial risks to the economy can be better assessed.

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