What Is the Liquidity Provider Agreement?
Trade orders in participation rights and shares are admitted to the context of this agreement, and it is accepted in the market, which prohibits manipulation in any form. The liquidity agreement can be defined as the contract between the investment firm and issuer, where the investment company will sell or purchase some participation rights or shares that have been issued by the issuer. The issuer sells or purchases rights or shares for the promotion and support of normal trade.
When Do You Need a Liquidity Provider Agreement?
This agreement can only apply when liquidity agreements that are related to participation rights and shares in investment schemes are in the regulator market or in multilateral trading. You can’t take this agreement in case of redeemed and indirect collective investment schemes.
Inclusions in the Liquidity Provider Agreement
In this agreement, the operating terms, conditions, and registration form are added together. This is confidential information, and it doesn’t include any other party in the agreement until it is agreed by both the main parties. Financial instruments can be replaced and supplemented as per written in the agreement.
How to Draft a Liquidity Provider Agreement?
You can add all the necessary clauses and terms which you find important to be added to the agreement. It is best that both parties discuss their points while formulating the agreement. Hiring an attorney for this purpose can also be a good decision to avoid any issues in the future.
Alternatively, you can download the template for the liquidity provider agreement.
Benefits of the Liquidity Provider Agreement
This agreement is beneficial to both the market and investors. It helps in fostering new listings, increasing liquidity, trade volume enhancement, and reduction of fluctuation in prices. It helps in trading liquidity of volumes and shares. The investors are able to gain more confidence in the market due to the presence of such an agreement. Fairer prices are present in the market as a number of investor’s increases in the market. It becomes easier for investors to liquidate their investments in such cases.
Key Terms/Clauses in the Liquidity Provider Agreement
While making the liquidity provider agreement, you should add all the inclusions and terms in the agreement.
Here are some major terms which you should use while drafting the agreement.
- The details of the licensing authority that the company grants the liquidity provider
- Whether any assignment of responsibility is permitted or not
- In case assignment is permitted, what are the rights and obligations of the assignment by the company to the liquidator
- The extent of communication and disclosures that the liquidity provider should make with regard to the deposits he makes, and the method of such communication
- The governing laws for the agreement
- The minimum amount of shares
- Time duration
- The minimum amount of priced shares
- Liquidity provision activity details
- List of measures on liquidity providers
- Violation conduct and punishments
- A disclaimer stating that the agreement has been drafted in accordance with the country laws of the trading venue where the issuer is allowed to trade.
- The agreement must also mention when the clause discussed above shall not be valid.
What Happens in Case of Violation?
In the case of the liquidity provider agreement, the firm has to face difficulty if the issuer doesn’t support and promote the trading of the firm. The investment firm and issuer both have to follow the rules as written in the agreement mandatorily.
Not adhering to the clauses duly mentioned in the agreement could result in a huge penalty levied upon either of the parties.
Contracts that rely on the fluctuations of the market and those that are subject to stringent market laws should be dealt with carefully. When drafting such agreements, it is important to write the clauses so that the interests of both the parties are covered and all the clauses comply with all applicable laws.
Sample Liquidity Agreement
A sample of the agreement can be downloaded from below.
