Monday, November 26, 2007
FINRA recently interviewed representatives from many of the largest prime brokerage firms to determine how the international prime brokerage business is conducted. The interviews covered the various practices used by the prime brokers and how they differed from practices used in domestic prime brokerage. International prime brokerage is defined as the practice whereby a foreign domiciled customer executes transactions through a member firm(the executing broker) that are settled and carried by another member (the international prime brokerage custodian) on behalf of its affiliated foreign broker-dealer (the foreign prime broker or FPB).
FINRA's review found inconsistencies between member firms with regard to legal documentation/agreements, settlement practices, books and records, and other areas important in defining the roles and obligations of the parties when a prime broker customer (who is generally foreign domiciled) purchases or sells U.S. securities with a foreign prime broker and a U.S. executing broker. In an attempt to establish consistency among member firms, share best practices, and apply fair and consistent standards to all firms that are active in this business, FINRA is soliciting comments from member firms and other interested parties on its Proposed Guidance regarding the IPB practices described herein. The Proposed Guidance extends the existing requirements set forth by the SEC in the 1994 No-Action letter to IPB transactions relating to: (1) account arrangement, (2) delivery instructions, (3) affirmation of trades, (4) books and records, (5) documentation, (6) confirmation of trades, (7) notification and (8) net capital. Regulatory Notice 07-58.