Clearing agreements occupy an unusual position in a broker-dealer's contract portfolio. They are commercially straightforward, they change rarely, and they allocate a set of functions that regulators examine closely. Most firms sign one, file it, and refer to it only when something goes wrong. The agreement is frequently older than the people who operate under it, and the operating relationship has usually moved on from what the text describes.
That treatment is defensible for a service contract. It is risky for a document whose main content is a division of regulatory responsibility between two firms that both remain accountable. An examiner reading the agreement will ask what each party undertook to do, how the other party satisfied itself that the work was performed, and where the evidence of that supervision sits. Those three questions are asked in the same order every time, and they are answerable from a single table if the firm has built one.
The second and third questions are the difficult ones. Firms can usually produce the agreement and describe the allocation. Far fewer can show a continuous record of monitoring the allocated functions over the examination period. That is the same gap documented in OCC and FFIEC vendor oversight expectations, where the contract exists and the oversight evidence does not.
What the allocation table actually says
Most clearing agreements contain a schedule allocating functions between the parties. Reading it as a list of obligations rather than as a description of the arrangement produces five clusters that each need an owner and a monitoring method.
- Account lifecycle, covering new account documentation, approval, customer identification and ongoing anti-money-laundering monitoring.
- Trade processing, covering order acceptance, execution responsibility, confirmation generation and error correction.
- Credit and margin, covering extension of credit, maintenance calls, liquidation authority and the notification path when a call is issued.
- Customer communications, covering statements, confirmations, proxy and corporate action notices, and the handling of returned mail.
- Books and records, stating by record type who creates, who retains, for how long and how access is granted on request.
The last cluster produces the most examination findings and the least negotiation attention. A record created by the clearing firm may be one the introducing firm is required to retain, or the reverse, and the agreement often describes retention in general terms that do not resolve the question for any specific record. Working through the record types individually is tedious and it is the single most useful thing a firm can do with the document after signature. The output is a short table that can be handed to an examiner directly, and producing it usually surfaces two or three record types that neither firm believed it was retaining.
A function performed by the clearing firm still sits inside the introducing firm's supervisory system. The practical consequence is that every allocated function needs a named internal owner whose job is to review how it is being performed, with a documented cadence and a retained output.
Turning the agreement into monitorable obligations
Converting the allocation schedule into a working register takes five fields per obligation. The structure is deliberately plain so that it survives staff turnover on both sides, which matters more here than in most contract categories because clearing relationships routinely outlast the operations managers who run them day to day.
- Function and performing party. One row per function, with the firm that performs it and the clause reference that says so.
- Monitoring method. The specific exception report, reconciliation or periodic review through which the other firm supervises it.
- Frequency and recipient. How often the monitoring output is produced and the internal role that receives and reviews it.
- Evidence artifact. What is retained to show the review happened, such as a signed report review or a reconciliation sign-off.
- Escalation trigger. The threshold or event that moves an exception from routine handling to formal escalation between the firms.
A five-step implementation roadmap
Step 1, Extract the allocation schedule into rows
Take the schedule and produce one row per allocated function with its clause reference. Agreements negotiated over several amendments often allocate the same function twice with slightly different wording, and the row-by-row read is what surfaces the conflict.
Step 2, Attach a monitoring method to every retained and allocated function
For each row, record how performance is observed. Functions with no monitoring method are the exposure, and in most portfolios they are concentrated in low-volume areas such as corporate action processing and returned mail handling.
Step 3, Fix the exception report inventory
List the reports actually received, compare them with the reports the agreement names, and reconcile the difference. Report sets drift over years of operation, usually by addition rather than removal, and the agreement is rarely updated to match.
Step 4, Resolve books and records by record type
Work through the record types applicable to the business and confirm creation, retention, format and access for each. Where the agreement is silent, document the agreed position with the clearing firm in writing and append it rather than relying on established practice.
Step 5, Test the exit provisions on paper
Walk the termination clause through a hypothetical conversion. Identify what data would move, in what format, on what timeline and at whose cost, and record the gaps. This exercise takes a day and is the one most firms have never performed.
Hold the allocation as live records
Every allocated function with a monitoring method, a reviewer and retained evidence.
Why exception reports deserve contractual attention
Exception reports are the main instrument through which an introducing firm supervises work it does not perform, and they are almost always treated as an operational detail rather than a contractual one. The consequences show up slowly. A report is renamed during a platform upgrade and stops reaching the reviewer. A threshold is changed to reduce volume and nobody records who approved it. Two years later the firm cannot demonstrate what it was reviewing or why. Naming the reports in the agreement, with frequency and recipient role, makes each of those changes a contractual amendment rather than a configuration choice, which is the same control logic behind a structured ICT contract register.
Allocated functions and their monitoring evidence
The table shows a representative allocation with the monitoring method that typically supports it. Specific allocations vary by agreement and should be read from the schedule rather than assumed.
| Function | Commonly performed by | Monitoring method | Retained evidence |
|---|---|---|---|
| New account approval | Introducing broker | Periodic account documentation review | Review log with sampled accounts |
| Customer identification and screening | Shared, as allocated | Exception report on failed or pending checks | Reviewed report with disposition notes |
| Margin calls and liquidation | Clearing broker | Daily call report and escalation log | Call report with introducing firm actions |
| Statement and confirmation delivery | Clearing broker | Delivery failure and returned mail report | Report with remediation record |
| Books and records retention | Allocated by record type | Annual record type reconciliation | Signed reconciliation by record type |
A clearing relationship that has run without incident for a decade tends to be governed by habit rather than by the agreement. That is comfortable until the business changes, a platform is replaced, or an examiner asks a question that habit cannot answer. Keeping the allocation live as a set of owned obligations costs a few days a year and makes every one of those moments straightforward. The register also becomes the natural starting point when the firm next renegotiates, because it shows which allocated functions have generated exceptions and which clauses have never been exercised at all.
For related guidance, see Vendor contract controls for OCC and FFIEC exam readiness, Vendor contract controls for OCC and FFIEC examinations and OCC and FFIEC expectations for vendor contract files.
