4/24/2007 Executing Broker in Give-Up Does Not Have “Account” For CIP Rules
A futures commission merchant operating as an executing broker in a give-up arrangement does not have an account with a commodity or option customer for purposes of the customer identification program rules applicable to FCMs. This was the conclusion of guidance issued by the Financial Crimes Enforcement Network and the Commodity Futures Trading Commission on April 20, 2007 (FIN-2007-G001), but the result follows the logic of guidance issued in June 2006 (FIN-2006-G011) which concerned the application of the correspondent account rule in give-up arrangements. In a give-up arrangement, a futures commission merchant acts as an executing broker by executing an order on an exchange for a commodity or option customer. Under exchange rules, the order is given up to a clearing broker to clear the transaction. The executing broker thus executes the trade requested by the customer and then directs it to the account that the customer has established with its clearing broker. If the clearing broker does not accept the trade, then the executing broker may enter into an agreement with the commodity or option customer to clear the executed trade, or the trade may be directed to an account at another clearing broker, or the trade may be liquidated. In the situation where the executing broker establishes a futures account for a commodity or option customer whose trade was not accepted by its clearing broker, the executing broker will, in fact, become subject to the customer identification program rule with respect to that customer. The 2006 guidance had concluded that when an executing broker executes account-opening documents with the market participant, it will become a carrying broker subject to compliance with the due diligence provisions of the correspondent account rule. This development will be incorporated into the chapter on broker-dealers in Money Laundering, Terrorism, and Financial Institutions, by Raymond Banoun and John Ensminger, and will be the subject of more detailed comment in a forthcoming issue of the Monitor.
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