Broker Dealer Best Practices

Perform Periodic Cost Benefit Analysis to Determine Which Activities Should Be Outsourced to Improve Research Quality

Best Practice (Good)

Perform periodic cost benefit analysis and determine if all or parts of the Investment & Market Research function should be outsourced to external research providers. Work with management to ensure that part of the cost benefit analysis is used to establish which external research outsourcing model (i.e., the captive approach or third-party outsourcing approach) best aligns with the brokerage firm's business goals. This allows brokerage firms to combine internal and external research methods in order to cover the entire research spectrum (i.e., equity, credit economic, portfolio strategy, commodities, global market research, etc.) required today, optimize costs and free up broker-dealers to perform more client-facing activities.

Typical Practice (Bad)

Use only in-house/internal investment and market research teams and broker-dealers to perform necessary research activities. This not only provides customers with high research transparency, but it also increases the ability of the brokerage firm to protect their intellectual property and sensitive data/information. Ensure that more broker-dealers are hired to handle any increase in customer inquiries and/or research demands.

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Benefits:

Due to increased regulatory pressure, low broker-dealer productivity, higher customer inquiry volumes and research demands, and general distrust in the advice given by brokerage firms, developing a balance in internal and external investment and market research has become integral in customer portfolio construction and overall asset allocation. As such, brokerage firms should not only perform a cost benefit analysis to determine just what that balance should be, but they should work with management to establish which external research outsourcing models to use (i.e., captive centers are typically more centered towards internal operations thus increasing intellectual property protection while third-party outsourcing provides high cost optimization) before the vendor vetting process begins. Such practices not only allow the brokerage firm to deliver transparent, unbiased and high quality research and advice to customers that takes the entire research spectrum (i.e., equity, credit economic, portfolio strategy, commodities and global market research) into account, but it also frees up broker-dealers to perform more client-facing activities while producing an ever more cost efficient environment.

Implement Proactive Fraud Management Prevention Educational Programs to Reduce Exposure to Regulatory Risk

Best Practice (Good)

Implement proactive KYC, AML and Customer Due Diligence programs that ensure that the bank or brokerage firm is not only compliant with fraud prevention training requirements, but also ensures that employees are highly knowledgeable on fraud prevention issues and the implement of fraud prevention protocols into routine work operations. Utilize fraud prevention educational courses/meetings regularly to assess changes in industry landscape, current events that may influence fraud prevention practices, potential changes to regulations, etc. Perform internal audits regularly (typically monthly or quarterly) to assess the bank's or brokerage firm's compliance with fraud prevention protocols.

Typical Practice (Bad)

Have employees undergo KYC, AML and Customer Due Diligence training as required by regulatory authorities. Set standard timelines for employees to complete fraud prevention training and monitor a checklist to ensure that employees have completed all required training courses and certifications. Training is performed when new employees are hired or when regulatory authorities implement changes that require additional training.

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Benefits:

Proactive fraud management and prevention education reduces the bank's or brokerage firm's exposure to regulatory and reputational risk. Employees who know how to analyze customer identities, determine and assess customer risk profiles, and detect suspicious transactional behavior will reduce the instances in fraud and boost overall customer confidence in the bank or brokerage firm.

Provide Both Parties of a Trade Easy Access to Trade Break Results to Reduce Resolution Cycle Times

Best Practice (Good)

Provide both sides of a trade or financial transaction the ability to easily access the up-to-date and full results of all trade breaks or failures arising from reconciliation issues (this is typically provided through online accounts or a centrally located Intranet-based resource) in order to assist in trade break or failure resolution. Include trades with entry field differences, market-to-market (MTM) differences and unmatched trades in the information provided. Ensure that trade break or failure information is actively monitored and automatically distributed to relevant parties irrespective of the technology used to perform the reconciliation, whether performed in house or through a vendor-serviced external platform, system or application.

Typical Practice (Bad)

Provide all relevant information on trade breaks or failures to a trade's counterparty upon request. Compile requested information manually by pulling data from in-house or vendor trading platforms, systems and applications to ensure high accuracy. It is the responsibility of the Trade Operations and Support employees to ensure data compilation, verification and submission to the counterparty is performed in a timely fashion to reduce trade resolution cycle times.

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Benefits:

Providing both sides of a trade or financial transaction the ability to easily access (typically through an online account or Intranet-based resource from the brokerage firm) the up-to-date and full results of all trade breaks or failures arising from reconciliation issues reduces the overall cycle time needed to resolve said trade breaks or failures. Furthermore, proactively monitoring trading transactions and ensuring that all trade breaks or failures are automatically reported to the relevant party members eliminates a large portion of manual work related to compiling and reporting data, thereby freeing up trade operations and support employees to perform other tasks.