Stock Broking Firm Operations: Chapter 5

• Chapter 5 discusses the operations and services of a stock broking firm.
• The stock broking firm duties to the client, the departments in the stock broking firm, the Capital Market Services Representative and the Principal and Agent: Contract of Agency are discussed.
• Learning outcomes include being able to discuss stock broking firm duties to its client, differentiate the departments in a stock broking firm, and learn the duties of the Capital Market Services Representative.

Stock Broking Firm Duties to Clients

• Must obey instructions and make the best deal possible for the client.
• Required to issue a contract note and not compete with the client.
• Must inform the client when acting as principal.
• Should also maintain due care and diligence and keep client accounts separate.

Types of Clients

• Institutional clients include Permodalan Nasional Berhad, Employee Provident Fund and insurance companies.
• Foreign Clients include brokers/SBC/PO.
• Corporate Clients
• Cooperative institutions e.g. Felda, Koperasi Polis.
• Direct or margin individual clients.

Main Departments in a Stock Broking Firm

• Dealing Department executes client transactions, receiving, executing, and confirming transactions, usually supported by the research department.
• Operations Department processes all dealing transactions and trade settlements, preparing contract notes and necessary reports for contra transactions.
• Treasury Department manages the balance sheet, capital management, interest or profit rate management, and funding and liquidity management via Islamic and Conventional Sections.
• Credit Control Department ensures exchange policies are followed, monitors dealing transactions, and manages client trading limits.

Other Departments in a Stock Broking Firm.

• Research Department
• Derivatives Department
• Back Office (Operations and Technology)

Capital Market Services Representative (CMSR)

• A person engaged in the securities industry licensed to protect potential investors and maintain appropriate standards.

Commissioned CMSR

• Functions like an entrepreneur, not as an employee of any SBC, receives commissions but not a fixed income.
• Bears all operational costs, has high risk since business depends on their commission and ability to track clients, but potential for higher returns.

Paid CMSR

• Functions as an employee bound to a contract of employment.
• Receives a fixed monthly income, stationed at investment banks.
• Clients are introduced by the firm, offering low risk and low return.

Restrictions of CMSR

• Cannot be engaged in any other business activities.
• Cannot to be a director/shareholder/debenture holder in any company dealing in the security business.
• Cannot have any interest in a company formed to transact shares/securities.
• Cannot transact any business/deal with a person/company formed to deal in securities/other shares.
• Cannot open a client's account except for a reputable institution/corporation and clients residing outside Malaysia.

Principal and Agent

• The Law of Agency is governed by Part 10 of the Contracts Act 1950.
• Section 135 defines an agent as someone employed to act for another or represent another in dealings with third persons.
• A principal is defined as the person for whom such act is done, or who is represented.

Duties of Agent

• To act on behalf of and be subject to the control of the principal.
• To act within the scope of authority delegated by the Principal.
• To discharge their duties with appropriate care and diligence.
• Should avoid conflicts between their personal interests and those of the principal.