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INTRODUCTION
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1
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This annex,
MAR 3 Annex 3, is a statement of what the FSA understands to be generally regarded
as good market practice and conventions in certain areas. It is not guidance on rules and is issued under
section 157(1)(d) of the Act .
This annex applies to all kinds of inter-professional
business. It will be evident that much of the content is equally
applicable to market counterparties as
well as firms.
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CONFIDENTIALITY
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2
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When information
is received from a market
counterparty under conditions of confidentiality, that confidentiality
is likely to be enforceable by the owner of that information. Confidentiality
should be respected, subject to regulatory and legal requirements.
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3
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Firms are reminded that
the use of loudspeakers in broking and dealing rooms in close proximity to
other lines of communication could result in breaches of confidentiality.
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NEGOTIATION
OF TRANSACTIONS
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4
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It is good practice
for a firm to
agree expressly all the economic terms of a transaction before it commits
itself to the transaction. A firm should
negotiate the remaining terms in good faith and try to agree them as soon
as possible.
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5
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It is good practice
for a firm to
regard itself as bound to transact once the rate or price and any other key commercial terms
have been agreed (whether orally or in written form), unless the parties explicitly
and unambiguously agree to the contrary.
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6
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Generally, a firm that regularly uses
the services of a firm acting
as a name-passing broker should
indicate to it the market
counterparties with which, and the investments in which, it is not prepared
to transact. That indication should not be in a form which would damage or
lower the standing or reputation of the market
counterparty in the estimation of reasonable market counterparties if they knew of it.
A firm which
is given an indication should treat it as confidential.
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FIRMNESS OF
QUOTATION
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7
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It is good practice
for a firm to
follow market conventions regarding quotation, unless it has specifically
agreed otherwise with its market
counterparty in advance. It should be clear to a market counterparty ;
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(1) whether
the quote is firm or not;
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(2) whether
the quote is subject to any conditions, and, if it is, what they are;
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(3) for how
long the quote remains firm (in fast moving markets, when practicable); and
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(4) whether
the quote is firm only for the normal marketable amount (if appropriate, otherwise
the firm should
state the size of the quote).
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8
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Express clarification
of these matters is not necessary to the extent that the firm quotes in accordance with the relevant
market convention or exchange rules (if applicable).
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9
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When a firm quotes to a market counterparty a firm rate or price (whether
through an arranger, or name-passing
broker , or directly), it is not good practice for the firm then to withdraw
that quote or, if that quote is accepted during the period for which the quote
remains firm,
to decline to deal at that rate or price. A firm may decline to deal with a market counterparty in
these circumstances if it was unaware of its identity when the firm gave the quote and
the name turns out to be unacceptable, for example, on the grounds of credit
risk.
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LIMIT ORDERS
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10
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Before a firm accepts any limit
order from a market counterparty,
it is good practice to have made and implemented appropriate:
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(1) policies
on these orders and in particular the circumstances in which and the terms
on which it will accept these orders; and
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(2) systems
and controls for carrying them out.
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11
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A limit order
means a stop loss order and any other instruction from a market counterparty to execute transactions
if rates or prices reach specified levels. These orders may be time limited
or may be for an indefinite period.
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OUT OF HOURS/OFFICE
DEALING
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12
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It is good practice
for firms to issue guidelines to their staff on transactions entered into
after normal hours or from outside premises, either by mobile phone or any
other equipment. The guidelines should cover:
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(1) the type
of transactions which may be undertaken in this way;
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(2) where and
with whom these transactions may be executed;
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(3) permitted
limits;
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(4) how and
when these transactions should be booked into and recorded on the front and
back office systems; and
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(5) how and
when these transactions are to be confirmed.
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13
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When answering
machines are used for instant reporting and recording of all off-premises
transactions, they should be installed and located in such a way that reported
transactions cannot subsequently be erased without senior management approval.
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14
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The use of mobile
phones for business purposes from within the dealing room, except in an emergency,
is considered bad practice.
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SETTLEMENT ERRORS
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15
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If a firm becomes aware of
a settlement error that benefits it at the cost of a market counterparty , it is good practice
to inform the market counterparty promptly
and reverse the error.
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16
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If a firm , acting as a broker , becomes aware
that it is holding assets on behalf of a market
counterparty because of a settlement error which adversely affects
that market counterparty ,
it is good practice to inform the market
counterparty promptly and try to rectify the situation.
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CONFIRMATIONS
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17
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Confirmations
provide a useful safeguard against dealing errors and can be a valuable element
in the control of the firms inter-professional business and
exposures. It is good practice for a firm to
make available to, or provide to, the market
counterparty written confirmation of the material terms of a
transaction between them, as soon as possible after the transaction has been
agreed or executed.
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18
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It is acceptable
market practice for the firm to
agree with its market counterparty that
only one party need send a confirmation. If a firm undertakes this practice to a material
extent, it is advisable to identify the legal and other risks involved and
address them in the firm's risk
control policies.
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19
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If there is
a standard form of confirmation that applies to a transaction a firm enters into, it is
good practice to ensure that that form is used, unless there is good reason
not to. One example of when there is an applicable standard form confirmation
is when the parties enter into the transaction under the terms of a master
agreement that provides for an applicable form of confirmation. Another is
when it is customary in the market concerned to use a particular form of confirmation
for transactions of that kind.
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20
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In general,
it is not good practice for confirmations to be issued by or sent to the individual
dealer responsible for the transaction. It is good practice to ensure that
the dealer concerned is not responsible for checking confirmations unless
there are exceptional circumstances. If the dealer is given that responsibility,
it is good practice to subject the process to independent monitoring.
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21
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In general,
it is good practice for a firm which
arranges a transaction to try to ensure that the parties agree who is to issue
a confirmation.
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22
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Some transactions
are matched through an electronic matching system that does not provide for
the issue of confirmations, but instead makes and retains records of transactions
itself. In these cases, it may be appropriate for a firm neither to receive nor issue confirmations,
provided the system allows for the back offices of users to verify the details
of transactions entered into on the system.
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The statements
of good practice in paragraphs 17 to 22 do not apply to on-exchange business.
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STANDARD SETTLEMENT
INSTRUCTIONS
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It is good practice
for a firm to
make and implement appropriate policies on the use of standard settlement
instructions (SSIs) to reduce the incidence and size of differences arising
from a mistaken settlement of funds. These are especially appropriate when
the firm has
a relationship with a market
counterparty which suggests there will be regular payment of
significant amounts.
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25
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It is good practice
to establish SSIs in a secure and verifiable format. A firm acting as an arranger (or name-passing broker) has no responsibility
for ensuring that its market
counterparty have SSIs in place.
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MASTER AGREEMENTS
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Firms are encouraged to
negotiate and execute master agreements. These govern the relationship between
the parties and how such a relationship and all transactions under it shall
be terminated in the event of one party's default upon a transaction. It is
recognised that executed documentation can be and should be used as an efficient
risk management tool. Firms
should consider the benefits of valid close out netting provisions (see IPRU).
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27
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If it is the
policy of a firm to
use master agreements, it is good practice to make and implement policies
for what transactions should be subject to the terms of which master agreement
and have systems and controls for ensuring compliance with that policy. If
a firm has
a policy that transactions should be entered into with a market counterparty only after a master agreement
has been implemented, it is advisable to have procedures to ensure that any
exceptions are agreed at an appropriate level.
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COMMISSION/BROKERAGE
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It is good practice
for firms acting
as principals to pay due brokerage bills promptly. Overdue payments can seriously
disadvantage wholesale
market brokers, since overdue payments result, in their treatment
by the FSA for
regulatory purposes, as an increase in their cost of capital.
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DISPUTES
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29
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In the event
of a dispute between a firm and
a market counterparty,
it is preferable for the parties to seek to resolve the issues themselves.
If they cannot reach agreement, they should consider the advantages of using
established arbitration or mediation services.
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