Whole Section

  • Practice Note 4.10.1(b) Pre Execution Checks

    • 1. Introduction

      • 1.1

        Rule 4.10.1(b) requires Trading Members to ensure that adequate pre-execution risk management control checks are conducted, including automated credit control checks on every order and trading limits for each Trading Representative.

        Added on 3 June 20193 June 2019.

    • 2. Pre-execution checks

      • 2.1

        The purpose of requiring Trading Members to ensure that adequate pre-execution risk management control checks are conducted is to prevent overtrading and for credit risk management. As such, the checks must be appropriately set to effectively limit the firm's risk exposure arising from every order (including proprietary orders) to prevent the taking on of excessive risk.

        Added on 3 June 20193 June 2019.

      • 2.2

        The parameters of such pre-execution checks and filters may include but are not limited to:

        (a) dollar limit to control the gross buy and sell value and/or net buy/sell value. This limit may be applied to an individual customer, a Trading Representative, a group of related accounts or a proprietary account carried on the books of the Trading Member;
        (b) security limit to control the dollar/quantity exposure to each security. This limit may be used to control concentration risk for each customer and for the Trading Member's accounts as a whole on a per-security basis;
        (c) dollar/quantity limit and price limit for each order. This allows for the detection of errors in inputting orders. For example, if a customer or Trading Representative were to enter an unusually large sized order or an order at a price that is far from the prevailing price, they could be alerted for confirmation of the order before it is accepted by the system; and
        (d) controls to restrict customers to selected markets, order types and securities.

        Added on 3 June 20193 June 2019.

      • 2.3

        By way of illustration, pre-execution risk management control functions may include the following:

        (a) the ability to adjust credit or quantity limits in real time during a trading session;
        (b) the ability to set permission levels (e.g. access to selected products/instruments) and revoke the access of a Trading Representative or customer on a real time basis; and
        (c) the ability to intercept orders that exceed credit or trading limits on a real-time basis and trigger error-prevention alerts.

        Added on 3 June 20193 June 2019.

      • 2.4

        Trading Members who authorise Sponsored Access will be able to meet the requirement in Rule 4.10.1(b) by being able to directly set and control pre-determined automated limits in the Sponsored Access customer's system, having automated alerts whenever such limits are altered, and by conducting regular post-execution reviews of trades. Trading Members should assess and continue to ensure that the pre-execution risk management control checks are robust on an ongoing basis.

        Added on 3 June 20193 June 2019.

      • 2.5

        Where a Trading Member has allowed its Clearing Member to directly set and control pre-determined automated limits in the Trading Member's system, the Trading Member should have the appropriate internal controls to prevent unauthorised modification of the limits set by the Clearing Member.

        Added on 3 June 20193 June 2019.