Sales function checklist

Looking specifically at a dealer’s sales force, the following is a generalized checklist
of problem areas encountered:
Ω Market information
Ω Sales materials
Ω Term sheets
Ω Transactions
Ω Confirmations
Ω Valuations
Ω Warranties and representations
Ω Business conduct
Dealer salespeople should endeavor to ensure market information disseminated to
clients is obtained from sources believed reliable. Appropriate written disclaimers
should be employed. Salespeople should refrain from casting competitors in an
unfavorable light. Competitor comments should be limited to our credit department
has/has not changed its credit outlook on that name. As to derivatives transactions
activity, other customers’ names and activities should not be directly revealed
and any trade information should be shrouded sufficiently so that other clients’
confidentiality is preserved.
Derivatives sales materials should provide reasonable illustrations of the product.
The pricing over various scenarios should represent a valid range of scenarios and
assumptions should be clearly stated. Disclosure should provide all the relevant
information that is needed to enable a comprehensive analysis. The more standardized
the product, the more likely that standardized disclosure language may be
sufficient.
Term sheets should be accurate and disclose appropriate risks to consider. Pricing
and liquidity issues are especially important to mention. If the term sheet is being
sent out to multiple clients, it should be proofed carefully to remove any mention of
a specific company. The law department should approve standardized disclosures
and should be consulted for the one-off situations where a customized product is
involved. A legal department approval number with expiry date should be included.
For non-standard trades, it is often wise to do a ‘dry run’ if feasible and involve the
operations unit. Frequently there is a clearing issue or documentation issue or
details of the trade that turn out not to have been considered/finalized in advance.
It’s a preferred time to resolve these omissions before trade time. The completed
transaction should reflect the term sheet. ‘Bidding to miss’ (where a dealer makes
only a semi-interested bid for business) should be avoided since it hurts all parties
involved. The customer does not receive a true market price comparison, the bidder
may develop a bad reputation, and the winner does not get an accurate ‘cover’.
The following are items that should be clarified prior to time of trade:
Ω Exact legal name of the counterparty
Ω Verify credit availability
Ω End-user company has power to transact
Ω End-user employee has specific authority to transact
Ω Derivative is suitable given client’s size, sophistication, and risk profile
Ω End-user has analyzed or has the capacity to analyze the deal(s)
Ω Dealer is not acting as a fiduciary
Most large corporations have a large number of affiliates, partnerships, or joint
ventures. It is imperative that the dealer establishes who is the exact, legal counterparty
on a transaction. It will help determine the dealer’s legal rights in the event of
breach/non-performance. It is critically important to determine whether the enduser
is dealing in the name of its holding company, operating company, or other
corporate affiliate.
Credit availability should be obtained from a listing that is current. Some firms
rely on a printout from the previous day and do not have on-line capabilities to know
the full, current exposure. If credit approval is not preset, then salespeople need to
obtain current financials from client for the credit approval department. Even when
a dealer sells an option to an end-user, due diligence dictates that the dealer obtain
end-user financials as part of the ‘know your customer’ requirements.
Most corporate end-users are empowered by their charter to do almost anything.
Highly regulated industries like insurance companies and municipalities have significant
restrictions. The law department of the dealer should be comfortable with the
end-user’s power to contract or alternatively the dealer must ask for an amendment
to the charter or board approval or alternatively for a legal opinion from the enduser’s
counsel indicating that the contemplated transaction is permitted.
An end-user may have actual or apparent authority. The dealer should rely on
actual authority and the dealer should ask for a listing of approved traders. After the
trade, it may be prudent to ask for a certificate of incumbency of the end-user
employee/officer who signs the derivative confirmation.
Suitability does not simply mean that the end-user can use derivatives. Rather it
is a higher standard. Given the size, skill, and sophistication of the end-user (coupled
with its outside advisers if any) and in view of its risk appetite, past activity, etc. is
the deal appropriate? It is advisable to look inside the customer and establish that
the customer meets this suitability threshold.
One needs to ‘know the customer’. One should examine closely the economic
purposes for using derivatives. Some end-users in the past have used the swap
market to mask loans. A bank would make an upfront payment (or during the first
year) and the recipient would then repay the loan amount as part of the coupon
payments scheduled over the remaining life of the swap. In a similar vein, Merrill
Lynch currently is engaged in a lawsuit filed by the CFTC. Merrill is charged with
‘aiding and abetting’ Sumitomo to corner the copper market by providing a trading
account and more than a half billion dollars’ worth of financing and letters of credit.
The regulator charges that Merrill employees knew of the illegal conspiracy to corner
the copper market (Peteren, 1999).
The salesperson must be properly licensed and communication with the client
should be monitored periodically. Term sheets must be vetted to ensure sufficient
disclosures and disclaimer. It is important to note that adequacy of disclosure may
well vary with the complexity and risk of the product being sold. Although futures
contracts lend themselves to standardized disclosure, the OTC derivatives market
does not. Proper safeguards should be in place so that no side guarantees are being
made to the customer. Beware salespeople who are CPAs or JDs, since they may
cross the line and provide professional advice. One of the biggest sources of litigation
in the past has been the failure to adequately supervise the sales staff.
Confirmations should be timely and accurate. Typically in a large dealer, the
salesman, trader, and compliance/legal will review a confirmation before it is sent
out to the client. If a dealer is not able to send out a confirmation on a timely basis,
it should send out a preliminary confirmation. This would contain the name of the
product and a description of the transaction included essential information such as
notional amount, index, start and end date, and with the disclaimer that it is a
preliminary confirmation to be superseded by a formal confirmation. In times of
market turmoil, it sometimes occurs that confirmations are delayed. Given the lack
of written confirmation and fast moving markets, there exists the moral hazard where
a losing party denies the existence or terms of a deal. This can be combated most
effectively by securing a written confirmation.
Valuations sent to customers should always be written and qualified as whether it
is a firm price or an estimate. Whenever possible, it should also contain a reference
interest rate and/or volatility level along with date and time so that customer can
place the pricing in context.