In derivatives trading disputes a financial services provider may seek to rely on the terms and conditions of the client agreement and trading practices to close out positions.
The Financial Ombudsman Service (FOS) has indicated that in resolving disputes concerning a broker’s authority to ‘close out’ or manage a margin, that it will not only apply strict adherence to the terms and conditions of a client agreement but it will otherwise also consider a broker’s conduct and rights in the context of what is fair in the circumstances.
However, this position does not mean that FOS may not otherwise determine that, in satisfying the terms and conditions of the client agreement, a broker may not be liable for delays in trading order being placed.
The recent FOS Review for 2016-17 refers to a dispute lodged with FOS, in which a self-managed super fund client alleged that a delay in placing a share trading order into the market due to the broker’s platform being unreliable, caused a loss to the client because it was unable to trade.
The client was a trustee of an SMSF and had an account with the financial services provider, which was an online stockbroker with an automated order processing system.
The order placed by the client was to sell a large parcel of shares in an ASX-listed company in December 2015.
The broker delayed the order from being released to the market and client alleged that the delay was unreasonable and led to a significant loss after the share price fell.
The broker submitted that:
- the delay was necessary for the automated processing system to review the order
- the conduct was consistent with the client agreement
- the conduct was in compliance with its market integrity obligations.
FOS determined that it was reasonable to expect that orders would be reviewed by the automated processing system and the broker had an obligation to ensure all orders placed through its trading platform met regulatory and internal guidelines, which protected the integrity of the market and prevented market manipulation.
In this regard, FOS confirmed:
- the review of the orders was common and good industry practice
- the order at the centre of the dispute was referred for manual review and selected by the broker’s pre-set filters partly because of its large value and then released to the market
- the review process took less than four minutes
- the shares at the centre of the dispute experienced a substantial increase in trade volume on the day of the applicant’s order.
Ultimately FOS found that the delay was caused by the broker’s review of the applicant’s sell instruction. This was performed due to the broker’s internal procedures. Accordingly, the broker was not responsible for the client’s losses arising from loss of opportunity as a result of the review processing delay.
The broker’s position was strengthened by the terms and conditions set out the client agreement, in particular:
- the client agreement incorporated the General Conditions of Trade and Trading Rules
- the General Conditions of Trade provided that the broker was not obliged to accept any application or instruction to trade nor was it obliged to provide the client with reasons for refusing the application or instruction to trade
- the Trading Rules provided that the broker was entitled to take steps to check the bona fides of any client, order or instruction before action on that order or instruction.
The Advantage of Client Terms and Conditions
The FOS determination underscores the importance of the terms and conditions of the client agreement.
Unilateral client agreements used for online platforms trading in derivatives and hedging products are often drafted to give the broker power to protect their interests by reversing or cancelling contracts, varying prices or correcting ‘errors’. It is important to ensure consistency with market practice and trading rules to assist in achieving maximum protection for brokers.
Meridian provides regulatory and legal advisory services in the derivatives sector and to brokers, in particular in relation to client agreements, client monies and market rules. If you require assistance in this sector please contact our Financial Services Principal Michael Bracken.