The suspenseful truth of the overused Suspense account

Amanda Mark explores the do’s and don’ts of using suspense accounts and how to use them within a robust compliance framework in this recent article published in April’s SIAA Monthly.

Trading Participants must do all things necessary to provide their financial services efficiently, honestly and fairly (Corporations Act s912A). Suspense accounts can be a risk in this area. While many firms use their suspense accounts for bona fide trading activities, there is also a risk that they can also be used inappropriately to hide market misconduct.

This article explores the do’s and don’ts of using suspense accounts and how to use them within a robust compliance framework. Be warned, both the Australian Securities & Investments Commission (ASIC) and the various market operators are very interested in your suspense accounts.

Suspense accounts

A suspense account is an account set up by a trading participant to temporarily store trades until they can be allocated. ASIC has stated in a recent court enforceable undertaking, “Suspense Accounts are typically used for the temporary entry of orders and/or transactions in circumstances where there is incomplete or missing information to properly assign the order or transaction to the client’s account.”

Using a suspense account

Trading firms use suspense accounts on a daily basis in both the securities and derivatives space. Legitimate purposes for using a suspense account include:

• holding positions waiting on client account allocations
• principal trading positions waiting on allocation to relevant trading books
• orders placed by an investment manager where not all sub accounts have yet been set up in the trading participants systems (consider improving your processes to avoid this)
• A number of unrelated clients want to achieve an outcome over the day such as volume-weighted average price (VWAP) or time-weighted average price (TWAP) and the allocations will be made at end of day (consider having another account specifically for this type of trading)
• An overseas client submits an order through an intermediary and allocations are provided upon completion of the order (consider avoiding this by getting allocations upfront)

Suspense accounts should be flat at the end of each trading day. If you hold a position overnight then it must not distort the reporting obligations. If you do hold overnight, consider how your suspense account impacts your Daily Beneficial Ownership Reporting (DBOR) (see ASX24-operating-rules- Section-04) for principal trading and client trading, the calculation of capital for client balances and counterparty risk, and participant regulatory data . While these are all reasonable uses of suspense accounts you should contemplate how these scenarios impact your ability to meet your obligations.

Misusing a suspense account

Firms must be vigilant and implement robust processes to monitor who is using suspense accounts and why. If not closely monitored, suspense accounts can give rise to misuse, misconduct, or potential breaches of regulations.

ASIC has a history of enforcement action in this area, leading to enforceable undertakings, adviser bans, licence cancellations and market disciplinary actions. ASIC has taken action against firms and individuals over many years, yet firms continue to use suspense accounts for purposes they are not intended.

A December 2023 Court Enforceable Undertaking 031914829 outlines how an adviser instructed the Designated Trading Repetitive (DTR) to place buy orders using the suspense account as the reference for the orders to avoid identifying who the client was. This adviser was found to have breached conflict of interest procedures by:

• accepting client orders when wall crossed,
• failing to maintain client order records particularly when executed through the suspense account, and
• creating a false and misleading appearance of trading in the securities. The adviser was banned from industry for five years and must undertake retraining to be allowed to re-enter the industry. The AFSL holder failed to monitor and control the use of the suspense account, failed to maintain compliance measures and failed to ensure its representatives complied with financial services laws. The AFSL was found to have breached its obligations to act honestly, efficiently and fairly and the AFSL was cancelled.

ASIC has also taken action against a listed company that acquired shares in itself by issuing and holding shares in a suspense account, breaching the continuous disclosure laws.

Regulatory obligation considerations

When using a suspense account firms must consider if they are adhering to their regulatory requirements. They should consider their best execution obligations, client priority requirements and fairness as per their allocation policy.

If trades are executed using the suspense account has the firm met its order record keeping requirements? And can the regulatory data requirements be met when transmitting orders to an order book? Can conflicts be managed if the client identity is hidden behind a suspense account? Firms need a clear policy on who can use the suspense account and why.

Firms should constantly monitor their suspense accounts. It is not appropriate to review the suspense account only at the end of each day. Firms must carry out intraday monitoring to see who is moving transactions through the account, why, and at what time. Take note of trends, repeat offenders and trades with cancel corrects.

What to look for

Signs that someone is misusing a suspense account include:

• trades being moved into suspense prior to daily margin call calculations and back to the client after margin call processing for the day
• suspense trades being added to client orders where suspense accounts are used to create the appearance of active trading by multiple parties
• comingling of house and client trades
• VWAP or TWAP trades where specific executions get allocated to a specific client
• substantial positions being accumulated in suspense to delay reporting
• trades being executed prior to the client being onboarded

Minimising misuse

To minimise misuse and stay on the right side of the regulations firms should design and implement a clear policy on suspense accounts. They should train staff on the policy and the potential for misconduct. The policy must cover how the firm monitors the account, the independence of the control performer, how issues will be escalated and the consequences for non-compliance.

Conclusion

Suspense accounts are a legitimate tool in managing operational efficiency, but they should only be used in specific circumstances. Monitor them closely and be aware that ASIC has a track record of regulatory enforcement in this area.