When differences do occur, the following procedures should be observed in documenting and settling the consequent financial effects:
- Immediately upon realizing that a problem exists, both the trader and the broker have the responsibility of closing out any residual market risk and of identifying the dollar amount of any difference or dispute. This is a specific application of a more general proposition regarding position-taking activities of brokers and dealers: any time a mistake occurs that puts a dealer in an unintended position at the time the situation is discovered or take full responsibility for any loss that may subsequently occur.
- At the banking institution and at the brokerage firm, manag ement personnel not involved in the original transaction producing the difference should identify how the difference arose and confirm the dollar amount involved in order to allocate responsibility for the difference. This procedure transforms the dispute from an individual trader-broker issue to an inter-institutional issue.
- A written version of how the difference arose should be produced for the records of each firm.
- The banking institution and the brokerage firm should exchange written confirmations of the dollar amount of the difference and a date by which the difference will be settled. These confirmations should be sent to the areas that normally handle confirmation with a copy to the principals involved. These confirmations should be the basis for creating accounts payable or receivable balances in the name of the banking institution or the brokerage firm involved.
- Management should determine the level of exposure it is willing to accept vis-avis any firm and be able readily to identify the level of outstandings at any time.
- Settlement of differences should take place on a regular basis not normally extending beyond the end of the following month.
- Either the banking institution or the bokerage firm may request expedited payment of outstanding claims at any time.
- At the time the amount of compensation is set the amount of money involved in the settlement should be entered to an accounts payable or accounts receivable balance in the name of the brokerage firm or the banking ins titution with an offsetting entry either to a foreign exchange profit and loss account or to an errors account.
- Most differences arise in connection with spot transactions. Should a difference develop from transactions involving forward or item swap transactions. Compensation should coincide with the term of the underlying transaction.
The actual settlement of any bank-broker differences that do rise can be settled by one of two methods:
A. Difference Checks
Under this procedure any difference in a transaction would be paid by way of check payable to the institution not an individual to which the difference is owed. Payment could be made either periodically within the time frame suggested above or for each transaction, according to some predetermined schedule mutually agreeable to the two parties. Management should review regularly the individual and aggregate payments from and to each broker to identify patterns or unusual activity.
B. Adjustment of Brokerage Bills
Under this procedure brokerage firms would add a line at the end of the brokerage bill and after taking account of any discounts titled "adjustment for differences." If credits exceed the amount of a current month's bill the remaining balance should be repaid in full by check and/or credited to the brokerage bill at the end of the following month.
It is the Committee's view that the settlement of difference between banks and brokers should be even-handed providing for payment to as well as from brokers. Bank should assume that errors that turn out to be in the broker's favor are also to be settled in the manner described above; in other words these procedures should provide for compensation being paid by banks to brokers as well as the reverse.
An institution should have an explicit statement of policy on how its institution should proceed to reduce and deal with differences or disputes. Such a statement should state explicitly whether and under what circumstances its personnel can become involved in points transactions recognizing that any traders or brokers who allow unrecorded points transactions to be executed expose themselves to potentially significant financial legal and regulatory risks. It is the understanding of the Committee that procedures and records regarding policies for setting differences files concerning individual differences and records regarding unsettled differences can and will be reviewed by bank examiners.
