Give-Up

An executing broker sends a give-up notice to a customer's prime broker for a trade executed under a prime brokerage arrangement. The prime broker has not yet accepted the trade. Who is responsible for settlement of the trade at this point?

1. A.No one, since an unaccepted give-up means the trade has no settlement obligation until the prime broker responds.Wrong. The trade still has a settlement obligation; it simply has not yet transferred away from the executing broker.
2. B.The executing broker, because settlement responsibility does not shift to the prime broker until the prime broker accepts the give-up.Correct. Acceptance is the gate; before it occurs, the executing broker remains on the hook for settlement of the trade it executed.
3. C.The prime broker, because the prime brokerage agreement automatically assigns settlement responsibility for every trade the customer executes, regardless of acceptance.Wrong. Responsibility does not shift automatically at execution; acceptance of the give-up is what completes the transfer.
4. D.The customer directly, since prime brokerage relationships exist to remove settlement responsibility from both brokers entirely.Wrong. Settlement responsibility sits with one of the two brokers at any given point, not directly with the underlying customer.

Why: Acceptance of the give-up is the gate that transfers settlement responsibility. Until the prime broker actually accepts, the executing broker retains settlement responsibility for the trade it executed, even though the trade was intended for the customer's prime brokerage account.

A customer wants to establish a prime brokerage arrangement, executing trades through multiple executing brokers but settling and custodying everything through a single prime broker. What must be established before this arrangement functions operationally?

1. A.A prime brokerage agreement among the customer, the prime broker, and each executing broker, along with notice to the executing brokers of the prime brokerage relationship so they know to give up the trades to the prime broker rather than settling directly with the customer.Correct. A prime brokerage agreement plus notice to executing brokers is required for the arrangement to function.
2. B.Nothing beyond the customer's ordinary new account paperwork at the prime broker; executing brokers need no separate notice or agreement to participate.Wrong. Executing brokers need notice of the prime brokerage relationship for the give-up process to function.
3. C.A single executing broker must be selected exclusively, since prime brokerage arrangements do not permit trading through more than one executing broker.Wrong. Prime brokerage arrangements specifically allow trading through multiple executing brokers while settling through one prime broker.
4. D.The prime broker must itself execute every trade directly, since prime brokerage arrangements do not involve separate executing brokers at all.Wrong. Prime brokerage arrangements specifically involve separate executing brokers, with the prime broker handling settlement and custody.

Why: A prime brokerage arrangement depends on every party involved understanding its role: the prime broker agrees to settle and custody the customer's positions, while each executing broker the customer trades through needs to know it should give up those trades to the prime broker rather than settling directly with the customer itself. This requires both a formal prime brokerage agreement establishing the arrangement and notice to each executing broker so the give-up process actually functions as intended.