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Honest Broker

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Honest Broker is a procedure to facilitate the liquidation of security positions that have been pledged by book entry in DTC. It is exercised only in extraordinary circumstances, for example, when a pledgee is unwilling to release securities to a pledgor (typically, a broker under financial stress). 

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A pledgor may request that DTC perform as an honest broker for the pledgor's pledged securities.

DTC's Honest Broker procedure will be activated when requested by a pledgor when pledgees are unwilling to return pledged securities directly to a pledgor, but only at DTC's option after consultations with concerned parties indicate that such action is appropriate.

If the Honest Broker procedure is activated, DTC will notify pledgees and Participants of its activation and will advise them of the possibility that deliveries in settlement of their transactions with the pledgor may be received from the DTC HB Account rather than from the pledgor's DTC Participant account. In performing the role of honest broker, DTC will act as agent for the pledgee and will undertake no risk other than that arising from its own gross negligence.

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Via the Honest Broker function, you must specify which CUSIP numbers affect each pledgee participating in the Honest Broker procedure. For each CUSIP number for which you have initiated a DO, you must type the corresponding pledgee Participant number.

Note- The pledgee-CUSIP assignments specified using this option will remain in effect from one day to the next, unless you cancel them.

DTC will provide you with output via the Settlement User Interface detailing complete and incomplete honest broker DOs, as well as honest broker DOs that identify the pledgees whose shares were used to complete the DOs.

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As the pledgor, DTC's Director of Compliance will notify you that the Honest Broker procedure will be made available. After you are notified, you must

  • Identify the affected pledgees to DTC and
  • Notify the affected pledgees of your intent to use the Honest Broker procedure.

 

DTC will grant you access to the Honest Broker functions, which consist of various options that allow you to execute and cancel deliver order (DO) transactions and to maintain the Pledgee-CUSIP Assignment List and enter CNS deliver orders.

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Via the Honest Broker function, you can enter DO instructions for trades that you want to complete using securities pledged to the pledgees.

Note- DTC will not allow any repurchase (repo) transactions (reason code 81) or due bill deliveries in the Honest Broker function.

You can also use the Honest Broker Function to

  • Browse previously input DO transactions in the Honest Broker Control Account for transactions input on the same day.
  • Cancel transactions in the queue. Canceling a transaction requires a reason for the cancel, and the item must be canceled on the same day that it was entered.