Practice Note 4.6.7A(1)(b) — Pre-Execution Checks
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1.1 This Practice Note explains the parameters and functions which pre-execution checks may contain as contemplated in Rule 4.6.7A(1)(b).
2. Pre-Execution Checks
2.1 Rule 4.6.7A(1)(b) requires Trading Members to ensure that automated pre-execution risk management control checks are conducted on all orders, including credit control checks on all customer orders. The purpose of this is to prevent overtrading. 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.
2.2 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.
2.3 Trading Members who authorise Sponsored Access will be able to meet the requirement in Rule 4.6.7A(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.
2.4 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.