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The Banking Supervision Department today publishes a directive intended to regulate the activity in the broker dealer area, meaning receiving orders and executing transactions in securities and financial instruments for banking corporation customers, both as intermediaries and by trading for their own account. 

Supervisor of Banks Mr. Daniel Hahiashvili said, “The Directive is intended to protect customers and ensure best execution of transactions for customers, while maintaining the professionalism and integrity of the financial systems, in accordance with the international principles and standards in this area. In addition, the Directive also regulates principles for risk management and particularly operational risks, deriving from the banking corporation’s activities as a broker dealer.” 

The goal of the Directive is to ensure a fair market, high quality in transaction executions, and full transparency, which will assist in protecting the banking corporation’s investing customers and will enhance their confidence in the market and in the banking system. The protection of the customers is intended mainly to reduce the structural gaps between them and the banking corporations in terms of the level of knowledge and expertise, as well as the concern of conflict of interest deriving from banking corporations’ operations in a range of activities.

In addition, a banking corporation is required to implement, in its activities as a broker dealer, adequate principles of operational risk management. The implementation of such processes in securities and foreign exchange activities has to be done carefully and meticulously, while making special adjustments in line with the scope and complexity of the activity, exposure to a range of operational risks, including information systems risk, legal risk, embezzlement and fraud risk, compliance risk, conduct risk, reputation risk, and models risk.

In this overall view, of protecting the customer at the same time reducing operational risk for the banking corporations, the main requirements of the directive are as follows:

  • Establishing an organizational structure, policy, and procedures for executing transactions, providing control over them, and preventing conflicts of interest;
  • Adopting a code of conduct for acting with integrity, fairness, and professionalism on behalf of the customers’ interests, including customers’ securities activities and financial instruments at a level of their knowledge or experience;
  • Aligning customers’ activity in securities and financial instruments with their level of knowledge or experience, including alerting customers if they ask to execute a transaction that in the banking corporation’s view is not in line with their knowledge or experience.
  • Establishing procedures for carrying out fair and rapid execution of the customers’ instructions;
  • Adopting all reasonable means to achieve best execution result for the customers, through consideration, among other things, of the transaction’s characteristics: size, price, cost, speed of execution, reasonableness of execution, and the possible trading arenas;
  • Integrating adequate information systems in order to ensure a high level of protection from the realization of operating risks and cyber risk;
  • Maintaining documentation of each activity related to the transaction;
  • Developing a tool to monitor and control for the identification of suspicious or anomalous activities.

The banking corporations were given a year and half, until January 2025, to prepare for the implementation for the directive.