Professional Documents
Culture Documents
Trade Life Cycle
Trade Life Cycle
Trade Life Cycle
Training
Introduction
Facilitator Self Course Outline Break Timings
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Expectations
Static data How trade is booked Settlement and before settlement Trade booking and settlement Impact of incorrect settlement Pre-matching before a settlement Entire life of a trade Front office & middle office How trade is entered and how it is booked
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Section One
The Market Participants
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The Marketplace
INVESTORS
ISSUERS
AGENTS
Securities
IN VESTO RS
AGEN TS
Exchanges
AGENTS
Securities
INVESTORS
ISSUERS
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Stock Exchanges
Region Country Financial Centre London Stock Exchange London Stock Exchange (LSE) London Metal Exchange London International Financial Futures & Options Exchange (LIFFE) Deutsche Bourse Bolsa de Madrid Stock Exchange of Hong Kong Hong Kong Futures Exchange Shenzhen Stock Exchange Shanghai Stock Exchange Tokyo Stock Exchange Tokyo International Financial Futures Exchange (TIFFE) Stock Exchange of Singapore Singapore International Monetary Exchange (SIMEX) Australian Stock Exchange (ASX) New York Stock Exchange (NYSE) Chicago Stock Exchange Europe UK
Germany Spain Asia PacificChina China Japan Singapore Australia America USA
Frankfurt Madrid Hong Kong Shenzhen Shanghai Tokyo Singapore Sydney New York Chicago
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Example
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So far Covered
I. Market Participants
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Section Two
Static Data
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Equity, Bond, Warrant, Derivative, Commodity Short Name, Long Name, Size, Denomination, Issuer Coupon Rate, Payment Characteristics - 30/360, A/360 etc ISIN, Common Code, RIC, Quick Code, Cusip etc
Coupon Dates
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Must be populated correctly within all of the relevant systems. Must be obtained from a credible source as timely as possible.
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So far Covered
I. II. Market Participants Static Data
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Section Three
Trade Execution & Trades Processing
Trade Validation
Position/Inventory management
Trade Enrichment
Trade Processing
Trade Confirmation/Affirmation/Matching
Trade Instruction
Instruction/Agent Matching
Trade Settlement
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Trade/Position Accounting
Corporate Actions
Reconciliations
Cash Funding
What is a Trade?
A legal contract between two counterparties. A seller and a buyer. The SELLER must deliver the commodity he has sold to the buyer. The BUYER must pay the agreed purchase price on the agreed value date.
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Why Trade?
Speculate
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Trade Execution
Trade execution tends to operate in one of three ways where sellers and buyers execute trades: Trading Floor
Computerised Exchanges
This term applied to the liberalization of the London Stock Exchange (LSE) when Trading was automated.
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Trade Execution
Furthermore Trades can be: Quote Driven
level at which they are prepared to buy and sell with the intention of attracting business. NASDAQ (US) SEAQ (UK)
Order Driven
Orders from sellers are matched with buyers orders electronically. SEATS (Australia) Xetra (Germany) SETS (UK)
Electronic Communications Networks (ECN)
Trade Capture
Regardless of the trade execution/origin, all trades must be recorded formally by the market participant. To update a trading position for a specific security within a trading book To update average price of the current trading position to enable the trader to calculate trading profit or loss To allow trade detail to be sent through to the Back Office for trade processing and settlement As part of Market & Regulatory Reporting requirements To facilitate risk management Traders use complex trading systems to facilitate trading & position management, trade processing is usually done via Back Office processing systems.
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Trade Validation
Trade validation occurs to check if the trade information received in the Back office systems corresponds with the Front Office record. Trade validation includes the checking of constituent static data information: Examples include:
Is the security recognised on the system? Is the Counterparty account recognised? Is the Trader allowed to trade on the trading book? Is the trading book valid to trade security x? Is the value date a valid settlement date in the location of settlement? Are the securities restricted?
All detected errors must be investigated and corrected.
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Trade Enrichment
Trade enrichment exists to add specific trade data to the basic trade detail to allow downstream processing. This data is not usually held in Front Office Trading systems. This data can be added manually however in the STP environment the aim is to derive this automatically. Examples include:
Calculation of cash values. Regulatory Reporting required. Trade Confirmation requirements. Selection of custodian details. Selection of Settlement Instructions and communication method.
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So far Covered
I. II. Market Participants Static Data
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Section Four
Trade Confirmation
Trade Confirmation/Agreement
Trade Confirmation/Affirmation is an important process required to reduce the risk of the traders P&L. Until the counterparty acknowledges the trade detail the effect on the price or quantity of the trade is subject to change, impacting the traders book. Trade agreement can be achieved through:
Sending trade confirmations to the counterparty. Receiving trade confirmations from the counterparty. Trade or Contract Matching. Trade Affirmation.
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Trade Matching
Trade Matching generally applies to mandatory electronic matching of trade details. Both parties are required to input details to a central matching facility. Matching results (i.e. matched, unmatched) are provided by the trade matching facility to both parties. Examples include:
Omgeo Central Trade Manager (CTM). TRAX (Internationally traded debt & securities). Depository Trust & Clearing Corporation (DTCC) National Securities Clearing Corporations Trade Matching Service.
(NSCC)
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Trade Affirmation
Trade Affirmation relates to the electronic matching of trade details typically between securities institutions and Institutional clients. Trade details are input by the securities house and sent to a trade affirmation facility. The Trade affirmation central hub sends on the message. The institutional client agrees (affirms) or disagrees and the response is sent back to the securities house. Both parties must subscribe to the service. Examples include:
Omgeos Oasys Global system. FIX (Global) Oasys Domestic - (US) DTC ID (Institutional Delivery) (US)
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Summary
Basic Principles The longer a trades detail remains unchecked after trade date, the greater the risk of price movement and P&L impact. Trade confirmation/matching messages should be issued as soon as possible after trade validation. Timely and accurate confirmation generation is a major client service consideration. Prompt actioning of all confirmation discrepancies reduces trade risk.
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So far Covered
I. II. Market Participants Static Data
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Section Five
Trade Instruction
Settlement Instructions
Settlement Instructions are used to communicate the movement of securities and cash to the custodian. Trade Agreement confirms the commercial details of the trade. Settlement Instructions indicate the commercial details of the trade AND the location and account details for the cash and security movements. (Settlement Details).
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Instruction Content
Settlement Instructions tell the custodian/Agent to carry out precise commands such as: The quantity of securities to be received or delivered. The net settlement value to be paid or received. From whom securities will be received. To whom payment must be made. From whom payment will be received. To whom securities must be delivered. On which date to carry out these instructions.
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So far Covered
I. II. Market Participants Static Data
III. Trade Execution & Processing IV. Trade Confirmation V. Trade Instruction
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Section Six
Instruction/Agent Matching
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Status Update
Investigation and resolution of non-matching instructions. Updating the current status within the securities trading
organisations books and records.
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1 Settlement Instruction
Counterparty
Counterparty
Status
1 2 3 4
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Instructions sent in by Securities House and Counterparty. Instruction matching occurs. Status is recorded. Instruction Status (Matched/Unmatched) is sent back to both parties.
So far Covered
I. II. Market Participants Static Data
III. Trade Execution & Processing IV. Trade Confirmation V. Trade Instruction VI. Instruction / Agent Matching
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Section Seven
Trade Settlement
Settlement Terminology
Trade settlement is the act of exchanging securities and cash between buyer and seller. Value Date / Contractual Settlement Date. Actual Settlement Value Date and Settlement Date will be the same in the majority of trade settlement cases. A percentage of trades fail to settle on value date and will settle on another date referred to as the actual settlement date.
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Settlement Considerations
How to ensure trade settlement Ensure the seller holds the required level of securities at the correct custodian.
Types of Settlement
Full Settlement Partial Settlement Securities Only Cash Only Cross Currency Settlement Net Settlement
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Summary
Timely settlement of trades is an important part of the Trade Lifecycle with implications across the following areas: Inventory Management Cash Management Settlement Risk Cost Management Firm Reputation
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So far Covered
I. II. Market Participants Static Data
III. Trade Execution & Processing IV. Trade Confirmation V. Trade Instruction VI. Instruction / Agent Matching VII. Trade Settlement
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Section Eight
Position/Inventory Management
Inventory Management
Management of the stock holding is an integral part of trade settlement: Inventory Management ensures:
The correct amount of securities (nominal) are available At the correct location (depot). At the correct time (on value date).
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Realignment.
Borrow securities from another firm account different depot. Borrow the securities from the market. Borrow the securities from the custodian/central depository.
Execute a Repurchase Agreement (Repo) Do nothing and let the trade fail.
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Settle at Custodian
Securities
Cash
Choices
Choices
AutoBorrow
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Lend
Do Nothing
Repo
Do Nothing
Borrow Unsecured
Borrow required securities automatically. Borrow certain types of security automatically i.e. Spanish Bonds. Borrow upon request. Sometimes used as a last resort due to the cost.
Lenders
Lend all securities automatically. Lend certain types of security automatically. Lend upon request.
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partially settled, failed etc). The Securities Trading House automatically loads this information into the settlements systems. The system attempts to locate the relevant trade in its internal books and records. Once found it records the status update against the transaction. It will also automatically update the relevant security positions and balances reflecting the delivery or receipts.
Manual Updates
settlements specialist may manually record the update against the trade record.
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So far Covered
I. II. Market Participants Static Data
III. Trade Execution & Processing IV. Trade Confirmation V. Trade Instruction VI. Instruction / Agent Matching VII. Trade Settlement VIII. Position / Inventory Management
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Section Nine
Fails & Fail Management
Unable to use the cash to fund other security purchases. Unable to lend on money markets and earn credit interest on cash. Unable to pay off existing overdraft/debt. Unable to use securities required for an onward delivery causing a
break in the chain. Risk impact due to movement in the market causing a change in the value of securities. (mark to market)
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Interest Claims
An interest claim is compensation from the failing party to for the loss of cash interest or use of securities.
Failed trades are monitored to determine the reason for failure and
enable the interest claim to be executed against the counterparty. Some marketplaces (e.g. ISMA) have minimum claimable interest recommendations and deadlines by which claims must be issued. Back Office Settlements add immense value by actively monitoring instruction statuses and helping to accurately fund cash shortfalls or short positions. In some Securities Trading Houses, if the Firm Trader is at fault then the cost of the fail can be directly attributed to their book, impacting their P&L.
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So far Covered
I. II. Market Participants Static Data III. Trade Execution & Processing IV. Trade Confirmation V. Trade Instruction VI. Instruction / Agent Matching VII. Trade Settlement VIII. Position / Inventory Management IX. Fails & Fail Management
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Section Ten
Reconciliations
Internally between systems and departments Externally where securities and cash are held.
A Reconciliation Break is a discrepancy between one record and another All breaks should be investigated, accounted for and corrected to ensure continued integrity Automation of reconciliation reporting facilitates timely investigation and resolution of breaks on a daily basis
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Types of Reconciliations
Position Reconciliations Trade Reconciliations System Reconciliations
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So far Covered
I. II. Market Participants Static Data III. Trade Execution & Processing IV. Trade Confirmation V. Trade Instruction VI. Instruction / Agent Matching VII. Trade Settlement VIII. Position / Inventory Management IX. Fails & Fail Management X. Reconciliations
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Section Eleven
Clearing and Custody
Types of Custodian 1
Term
Custodian
Description
Example
An organisation that holds securities and Deutsche Bank Domestic cash on its clients behalf and may effect Custody Services trade settlement on its clients behalf. As per custodian, but has a network of local (or sub-custodians) that hold securities and cash and effect trade settlement on behalf of the global custodian. State Street Citigroup BoNY Paribas
Global Custodian
Local Custodian
A custodian that operates within a specific Credit Lyonnais Paris financial centre. Banco Espirito Santo Lisboa A custodian within a Global Custodians network of custodians. Citibank Milan Citibank Madrid
Sub-Custodian
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Types of Custodian 2
Term Central Securities Depository (CSD). Description Examples An organisation that hold securities, DTC (USA) normally in book entry form; usually the CREST (UK & Eire) place of settlement, effected through book JASDEC (JPY) transfer. A CSD that handles domestic securities of CCASS (HK) the country in which it is located.
International Central A CSD that handles domestic and Euroclear (Brussels) Securities Depository international securities. Clearstream (ICSD) Only two organisations are recognised as (Luxembourg) ICDSs. Settlement Agent
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An organisation that effects the exchange Citibank Milan of securities and cash on behalf of its Citibank Madrid clients; resultant securities and cash
So far Covered
I. II. III. IV. V. VI. Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching
VII. Trade Settlement VIII. Position / Inventory Management IX. X. XI. Fails & Fail Management Reconciliations Clearing & Custody
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Coupon Payments Cash Dividends Stock Dividends Stock Split Bonus Shares
A notification that may or may not require a response from the securities owner
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Section Twelve
Trade & Position Accounting
Controlling
The accounting group within the bank is responsible for correctly recording and monitoring all of the financial transactions occurring within the Securities Trading House: Deutsche Bank Controllers include: Legal Entity Controller (LEC)
Controlling Responsibilities
Monitor Stock/Security Positions Monitor Cash Balances Track Firm Books and Records Create Good Processes Create Controls Reconcile Trade Data Reconcile Cash Flow Reconcile all Journal activity
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So far Covered
I. II. III. IV. V. VI. Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching
XI.
VII. Trade Settlement VIII. Position / Inventory Management IX. X. Fails & Fail Management Reconciliations
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Section Thirteen
Regulatory & Compliance Responsibilities
Regulators
Regulatory authorities exist within the securities industry to ensure: All business undertaken within the marketplace is done in the proper manner To protect investors who are participants within the marketplace Guard the reputation and integrity of the marketplace Monitor activity which fails outside of normal business trading practice
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Regulator Responsibilities
Assessing suitability of securities trading houses to participate within the market place. Monitor the business undertaken by securities trading houses, investment advisors & fund managers. Enforcement of laws and possible prosecution of security law violators.
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Regulatory Authority
Australian Securities & Investments Commission Prudential Regulatory Authority Bahamas Central Bank Commission des Operations de Bourse Banque de France Securities & Futures Commission Monetary Authority Financial Supervisory Agency Financial Reconstruction Commission Monetary Authority of Singapore Financial Services Authority (FSA) Securities & Exchange Commission (SEC) US Commodity Futures Trading Commission National Futures Association
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Reporting Methods
A number of methods exist dependent on how the local Regulator requires reporting to be effected Automatic forwarding of trade details by a computerised exchange requiring no additional reporting Automated message transmission by the member for confirmation/matching/instruction purposes part of which is used to satisfy transaction reporting requirements File feeds produced from Front Office/Back Office/Controlling systems and sent direct to Regulator
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Compliance
Compliance is the Banks internal regulator. Responsibilities include: Ensuring compliance to rules of appropriate financial regulatory body Handling confidential information Ensure that personnel are adequately and properly licensed to operate in the marketplace Managing anti-money laundering regulations Monitoring Employee Personal Trading
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So far Covered
I. II. III. IV. V. VI. Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching
XI.
VII. Trade Settlement VIII. Position / Inventory Management IX. X. Fails & Fail Management Reconciliations
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Section Fourteen
Conclusions
Conclusions
Reduce Settlement Cycles Increase Straight Through Processing for trades Increase use of central Counterparties Increase use of Golden Source static data Active management of collateral Minimise Risk Minimise Operational Cost Offer increased service to clients Manage increasing volumes Maximise internal efficiency
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Section Fifteen
References
Recommended Reading
Michael Simmons Stephen Valdez David Dasey
Securities Operations A Guide to Trade & Position Management An Introduction to Western Financial Markets An Introduction to Equity Markets An Introduction to Repo Markets Treasury Management The Handbook of Equity Derivatives Dictionary of Finance & Banking
Industry Websites
http://www.crestco.co.uk/ http://www.dtcc.com/ CREST Depository Trust & Clearing Corporation http://www.euroclear.com/ Euroclear http://www.jasdaq.co.jp/index_en.jsp Japanese Securities Depository Centre http://www.isma.org/home.html International Securities Market Associations http://www.bankofengland.co.uk/Links/setframe.html Bank of England http://www.fsa.gov.uk/ Financial Services Authority http://www.sec.gov/ http://www.nasdaq.com/ Securities Exchange Commission National Association of Securities Dealers Automated Quotations.
http://www.amex.com/ American Stock Exchange http://www.londonstockexchange.com/London Stock Exchange http://www.lchclearnet.com/ http://www.liffe.com/ London Clearing House International Financial Futures & Options Exchange
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Industry Websites
http://www.iosco.org/iosco.html http://www.ipma.org.uk/ http://www.isda.org/index.html http://www.isla.co.uk/ http://www.isma.com/home.html http://www.liba.org.uk/ http://www.lsta.org/ http://www.sia.com/ International Organ Securities Commission International Primary Market Association International Swaps & Derivatives Association International Securities Lending Association International Securities Market Association London Investment Bank Association Loan Syndic Trading Association Securities Industry Association
http://www.securities-institute.org.uk Securities Institute http://dspace.dial.pipex.com/jhalsey/ Compliance Exchange http://www.world-exchanges.org/ http://www.trioptima.com/tri/ Federation of Exchanges OTC Derivatives termination service Financial Regulatory Authorities
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http://www.finanz-adressen.de/WE-fin-regulatory.html
Industry Websites
http://www.exchange-handbook.co.uk/Exchange Handbook http://www.investorwords.com/ http://www.stpforum.com/ http://www.stpinfo.com/ http://www.afponline.org/ Glossary STP Forum STP Info Association for Financial Professionals
http://www.calpers.ca.gov/index.jsp?bc=/investments/straightthrough.xml Virtual Matching Utilities (VMUs); http://www.omgeo.com/ http://www.sungard.com/ OMGEO Sungard Systems
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