Can someone please help me understand , Principal trades is a transaction that involves a “discount” or a “spread”. (CFA Book 1, page 143). Regarding the “recommeded” section “relationship with clients”, How do we determine that it is permissible to use client brokerage to benefit clients other than the account generating it, ( of course after disclosing it, and obtaining prior consent fromt the client) Does anyone have an example? Thank you
Principal trades are guaranteed by the broker and as such reduce opportunity costs. In terms of client brokerage. Directed brokerage CAN ONLY benefit THE client the trade is related to NO ONE ELSE Agency trade related brokerage CAN benefit other clients AS LONG as over the long term brokerage related research evens itself out…ie other agency trades benefitting other clients Principal trades MUST benefit the client THE trade relates to if the portfolio is required to do so under regulatory rules. If the rules do not apply and the firm wants to use the brokerage from principal trades for the benefit of other clients the firm must disclose and get consent from the client the principal trade is in relation to.
The regulatory rule–is that ERISA 140? Also, when does it and when does it not apply?
Yes, for most of you guys in the US - ERISA applys to US pension funds. The question should tell you this as there is no way of knowing without them mentioning it! Given this is a global exam i cant see them being too US centric…ie knowing all those dates and anti trust acts…