COB 7.10 Margin requirements
Application
This section applies to a firm which executes a transaction in a contingent liability investment with or for a private customer, in the course of, or in connection with, its designated investment business.
Purpose
Principle 3 (Management and control) requires a firm to have adequate risk management systems, while Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section aims to ensure that a firm does not expose itself to unacceptable levels of credit risk while managing its marginrequirements. It also aims to ensure that a firm manages a private customer's exposure to contingent liabilities by diligently monitoring the firm's relevant provision of credit.
Provision of margin by a private customer
- (1)
A firm must obtain from a private customer any margin payable, whether at the outset or subsequently, by or to the firm, for a transaction in a contingent liability investment.
- (2)
The minimum margin to be obtained from a private customer in accordance with (1) for an on-exchange transaction in a contingent liability investment is an amount or value equal to the margin requirements of the relevant exchange or clearing house.
Before conducting a transaction with or for a private customer, a firm should notify the customer of:
- (1)
the circumstances in which the customer may be required to provide any margin;
- (2)
the form in which the margin may be provided;
- (3)
the steps the firm may be required or entitled to take if the customer fails to provide the required margin, in accordance with COB 7.10.5 R, including:
- (a)
the fact that the customer's failure to provide margin may lead to the firm closing out his position after a time limit specified by the firm;
- (b)
the circumstances in which the firm will have the right or duty to close out the customer's position; and
- (a)
- (4)
the circumstances, other than failure to provide the required margin, that may lead to the firm closing out the customer's position without prior reference to him.
Failure to meet a margin call
A firm must close out a private customer's open position if that customer fails to meet a margin call made for that position for five business days following the date on which the obligation to meet the call accrues, unless:
- (1)
- (a)
the firm has received confirmation from a relevant third party that the private customer has given instructions to pay in full; and
- (b)
the firm has taken reasonable care to establish that the delay in its receipt is owing to circumstances beyond the private customer's control; or
- (a)
- (2)
the firm makes a loan or grants credit to the private customer to enable that customer to pay the full amount of the margin call in accordance with the requirements of COB 7.9.3 R (Restrictions on lending to private customers).
In COB 7.10.5 R (1)(a) a relevant? third party includes a party connected with the transaction such as a clearing firm.