Reg-204 Buy-In Negotiation Strategy

Anonymous

User Our Trading Desk (We are the Agent Lender) just had a Reg-204 Buy-In Execution with a Prime Broker. We recalled the shares two weeks ago and the broker has been insufficient up until now. However, the custodian bank failed to process the settlement in time since the broker only delivered the shares at 2:50pm and the DTCC closes at or around 3:15pm est. Custodian banks are notoriously slow at processing securities settlements like these- thus the delivery failed and DTC closed before the shares could be properly delivered to cover the deficit. The Buy-In was executed by our client's execution prime broker on the other side of the trade in order to cover the shares that were sold out of the portfolio two weeks ago. We are now in the position of having to pass the buy-in cost along to our prime broker counterparty (I.E. "The Borrower"), however they are already very anxious, very loudly proclaiming over Bloomberg chat that they will not assume the buy-in cost because it was not their fault etc. How should we proceed with these negotiations in order to get the broker to absorb the buy-in cost/sell-fail costs? Our client is extremely sensitive to these matters, and from a behavioral standpoint, the broker is extremely difficult to deal with and never admits to making mistakes. Please formulate an extensive, articulate negotiation strategy that minimizes our liability as the agent lender and reduces the risk to our client, while maintaining the relationship with the broker.

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Prime Finance Strategist

In dealing with this complex situation involving a Reg-204 Buy-In Execution, it's important to approach the negotiation with the prime broker carefully, balancing firmness in your position with the maintenance of a good working relationship. Here’s a comprehensive strategy:

  1. Preparation and Understanding of Legal Position:

    • Familiarize yourself thoroughly with the Global Master Securities Lending Agreement (GMSLA) and any specific terms of your agreement with the broker.
    • Review Reg-204, especially focusing on responsibilities and penalties related to buy-ins and failed deliveries.
    • Consult with your legal team to understand the full extent of your rights and obligations in this scenario.

  2. Data Collection and Documentation:

    • Gather all relevant communication and documentation that tracks the timeline of events, including the recall notice, acknowledgement from the broker, and timestamps of delivery attempts.
    • Document the custodian bank’s processing times and highlight the broker’s late delivery as the root cause of the failed settlement.

  3. Internal Alignment:

    • Ensure all internal stakeholders (trading desk, legal, client relationship managers) are aligned with your approach.
    • Prepare a briefing for your client explaining the situation, emphasizing your efforts to resolve the issue in their best interest.

  4. Engagement with the Broker:

    • Start by acknowledging their concerns and frustrations, emphasizing your desire to maintain a healthy business relationship.
    • Present your collected data and timeline to factually demonstrate how their late delivery led to the failed settlement.
    • Refer to the GMSLA and Reg-204 to clarify the responsibilities and consequences of failed deliveries.

  5. Emphasize the Long-term Relationship:

    • Highlight the value of your ongoing relationship, citing past collaborations and the mutual benefits of a continued partnership.
    • Suggest that absorbing the buy-in cost is a gesture of good faith and commitment to the relationship.

  6. Seek a Win-Win Resolution:

    • Propose a shared responsibility model where both parties absorb a portion of the cost, presenting it as a fair compromise.
    • Alternatively, suggest other areas where they could provide concessions or added value to offset the cost of the buy-in (e.g., better rates in future transactions, other service enhancements).

  7. Leverage Mediation if Necessary:

    • If negotiations reach a stalemate, propose a neutral mediation process with a third-party experienced in securities lending disputes.
    • Ensure that the mediator understands the nuances of Reg-204 and securities lending agreements.

  8. Contingency Planning:

    • Prepare for the possibility that the broker refuses to accept any responsibility. In this case, consider the financial and relationship costs of pursuing legal action versus absorbing the buy-in costs.
    • Discuss with your client the potential outcomes and get their input on how to proceed.

  9. Communication and Follow-Up:

    • Maintain clear and consistent communication throughout the negotiation process.
    • After reaching an agreement, document all terms and ensure both parties sign off.

  10. Review and Process Improvement:

  • Post-negotiation, review internal processes to prevent similar situations in the future. This may involve earlier recalls, more stringent monitoring of deliveries, or clearer communication with custodian banks.
  • Share learnings with your team and use this experience to refine your approach to future negotiations and risk management.

Remember, the goal is to protect your interests and those of your client while preserving a working relationship with the broker. Diplomacy, factual clarity, and a firm understanding of legal obligations and rights are key in these negotiations.