A Chinese wall in the world of finance is referred to as a virtual barrier which is created in order to stop the flow of information mostly between investment bankers at a firm and traders. This prevents the sharing of any insider information which the bankers may have and any information which is legally or ethically questionable gets prevented from getting leaked.
For example, a financial firm is advising a company or acting on behalf of a company for a takeover bid of a rival company. Now there is a different sector of the same financial company who advises clients on buying and selling of stock options of the companies involved in the takeover bid. The Chinese wall, in this case, would prevent any illegal information being communicated to prevent insider trading.
The Chinese wall concept also has a legal standing in India with the Securities and Exchange Board of India making it mandatory for all listed companies to have a Chinese wall policy as a part of their internal procedures and regulations, also referred to as the company’s ‘internal code’. This also helps in creating a valid defense against insider trading allegations.
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