Life Cycle of a TradeTraining Academy
Introduction Facilitator Self Course Outline Break Timings   15 mins – Forenoon   45 mins – Lunch   15 mins – After...
ExpectationsStatic dataHow trade is bookedSettlement and before settlementTrade booking and settlementImpact of incorrect ...
What is your Idea of         Life Cycle of a trade ??Page 4
Section OneThe Market Participants
The Market Participants - Facilitators Brokers Dealers Investment Banks Stock Exchanges Agents Securities Trading Or...
The Market Participants - Investors Institutional Investors Mutual Funds (Unit Trusts) Pension Funds Insurance Compani...
The MarketplacePage 8
Markets & Stock ExchangesA Market is an environment in which securities arebought and sold. Central to some market places ...
Stock ExchangesRegion    Country     Financial   Stock Exchange                      CentreEurope    UK          London   ...
Other Market Participants Salespeople Data Providers Registrars Coupon Paying Agents Trade Matching Services Settlem...
Market Participants - IssuersOrganisations occasionally need to raise cash/capital to expandtheir businesses by: Selling ...
Where does Deutsche Bank fit?Deutsche covers multiple functions: Broker Dealer Fund/Asset Manager Investment Bank Iss...
So far CoveredI.   Market ParticipantsPage 14
Section TwoStatic Data
What is Static Data?Static Data is the common term to describe the store ofinformation used to determine the appropriate a...
Sources of Static Data Where possible, financial institutions try and create a core  of “Golden Source” static data to av...
Security Data Providers or Data Vendors Reuters Bloomberg Telekurs Rolfe & Nolan SWIFT DTCC Alert Direct/OMGEO Sta...
Counterparty Static Data Name, Address & Contact Details Authorized Credit Limits Related Companies Standard Settlemen...
Instrument Static Data Type of instrument   Equity, Bond, Warrant, Derivative, Commodity Issue   Short Name, Long Name...
Maintaining Static DataIncorrect static data causes many processing errors: Delayed Confirmations Unmatched Transactions...
Static Data Summary Bad Static Data results in reduced service levels to clients  due to processing hold-ups and possible...
So far CoveredI.    Market ParticipantsII.   Static DataPage 23
Section ThreeTrade Execution & Trades Processing
Straight Through ProcessingPage 25
What is a Trade? A legal contract between two ‘counterparties’. A seller and  a buyer. The SELLER must deliver the commo...
The Front Office Trading Sales Broking Corporate Finance Repo DeskPage 27
Why Trade? Speculate   Profit from price move or increase in value of the asset. Accumulate   Benefit from dividend on...
Trade ExecutionTrade execution tends to operate in one of three wayswhere sellers and buyers execute trades: Trading Floo...
Trade ExecutionFurthermore Trades can be: Quote Driven   Market Makers quote prices via computerised screens showing the...
Trade CaptureRegardless of the trade execution/origin, all trades must berecorded formally by the market participant. To ...
Front Office Trade Detail Trading Book Trade Date Deal Time Value Date Operation (e.g. Buy/Sell, Lend/Borrow, In/Out)...
Trade Validation Trade validation occurs to check if the trade information received in  the Back office systems correspon...
Trade Enrichment Trade enrichment exists to add specific trade data to the  basic trade detail to allow downstream proces...
So far CoveredI.    Market ParticipantsII.   Static DataIII. Trade Execution & Trades ProcessingPage 35
Section FourTrade Confirmation
Trade Confirmation/Agreement Trade Confirmation/Affirmation is an important process  required to reduce the risk of the t...
Trade MatchingTrade Matching generally applies to mandatoryelectronic matching of trade details. Both parties are require...
Trade AffirmationTrade Affirmation relates to the electronic matching of trade detailstypically between securities institu...
SummaryBasic Principles The longer a trade’s detail remains unchecked after trade  date, the greater the risk of price mo...
So far CoveredI.    Market ParticipantsII.   Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationPage 41
Section FiveTrade Instruction
Settlement InstructionsSettlement Instructions are used to communicate themovement of securities and cash to the custodian...
Instruction ContentSettlement Instructions tell the custodian/Agent to carryout precise commands such as: The quantity of...
Instruction Communication MethodsS.W.I.F.T.         Proprietary Messaging CREST             CREST DTC               DT...
So far CoveredI.    Market ParticipantsII.   Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV.    Trade...
Section SixInstruction/Agent Matching
Why do we match instructions?To reduce settlement risk by: Increasing the chances of trade settlement on value date Reso...
Matching at The Settlement AgentOnce Instructions have been received at the Custodian,the next lifecycle steps include: I...
Instructions Matching: Example   1   Instructions sent in by Securities House and Counterparty.   2   Instruction matching...
So far CoveredI.    Market ParticipantsII.   Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV.    Trade...
Section SevenTrade Settlement
Settlement TerminologyTrade settlement is the act of exchanging securities andcash between buyer and seller. Value Date /...
Settlement ConsiderationsHow to ensure trade settlement Ensure the seller holds the required level of securities at  the ...
Types of Settlement Full Settlement Partial Settlement Securities Only Cash Only Cross Currency Settlement Net Settl...
SummaryTimely settlement of trades is an important part of theTrade Lifecycle with implications across the followingareas:...
So far CoveredI.    Market ParticipantsII.   Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV.    Trade...
Section EightPosition/Inventory Management
Inventory ManagementManagement of the stock holding is an integral part oftrade settlement: Inventory Management ensures:...
Methods of Inventory ManagementIf securities are unavailable we can consider the following: Internal Book Transfer.   Bo...
Inventory & Funding ManagementPage 61
Automated Lending & BorrowingService provided by large Custodians and CentralSecurity Depositories: Borrowers   Borrow r...
How do Trades & Positions get updated? Automated Updates   Instruction statuses are sent in by the custodian (fully sett...
So far CoveredI.    Market ParticipantsII.   Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV.    Trade...
Section NineFails & Fail Management
Failing Trades and their Impact A failed trade is any securities transaction that does not  settle on value date. The bu...
Why Trades Fail Instructions not received by custodian Instructions remain unmatched on value date Insufficient cash, c...
The Importance of Managing Fails Fails will have cash implications   Interest claims on fails to receive.   Interest ex...
Interest Claims An interest claim is compensation from the failing party to  for the loss of cash interest or use of secu...
So far CoveredI.    Market ParticipantsII.   Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV.    Trade...
Section TenReconciliations
What are Reconciliations Reconciliations exist to check the accuracy of the firms  books and records:   Internally betwe...
Why do we monitor reconciliations? Regulatory Managing Risk Corporate ActionsTypes of Reconciliations Position Reconci...
So far CoveredI.    Market ParticipantsII.   Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV.    Trade...
Section ElevenClearing and Custody
Types of Custodian 1Term               Description                              ExampleCustodian          An organisation ...
Types of Custodian 2Term                 Description                             ExamplesCentral Securities   An organisat...
So far CoveredI.     Market ParticipantsII.    Static DataIII.   Trade Execution & ProcessingIV.    Trade ConfirmationV.  ...
What is a Corporate Action?Any action by an Issuer which may affect the investor: The distribution of benefits to existin...
Section TwelveTrade & Position Accounting
ControllingThe accounting group within the bank is responsible forcorrectly recording and monitoring all of the financialt...
Controlling Responsibilities Monitor Stock/Security Positions Monitor Cash Balances Track Firm Books and Records Creat...
Example Control Reports Reconciliations Profit and Loss Statement (P&L) Balance Sheet Reporting (BS) Buy and Hold Repo...
So far CoveredI.     Market ParticipantsII.    Static DataIII.   Trade Execution & Processing     XI.   Clearing & Custody...
Section ThirteenRegulatory & ComplianceResponsibilities
RegulatorsRegulatory authorities exist within the securitiesindustry to ensure: All business undertaken within the market...
Regulator Responsibilities Assessing suitability of securities trading houses to  participate within the market place. M...
Financial Regulatory Authorities      Country                     Regulatory AuthorityAustralia       Australian Securitie...
Reporting MethodsA number of methods exist dependent on how the localRegulator requires reporting to be effected Automati...
ComplianceCompliance is the Bank’s internal regulator.Responsibilities include: Ensuring compliance to rules of appropria...
So far CoveredI.     Market ParticipantsII.    Static DataIII.   Trade Execution & Processing     XI.   Clearing & Custody...
Section FourteenConclusions
Conclusions Reduce Settlement Cycles Increase Straight Through Processing for trades Increase use of central Counterpar...
Section FifteenReferences
Recommended Reading Michael Simmons   Securities Operations – A Guide to Trade & Position Management Stephen Valdez   ...
Industry Websites http://www.crestco.co.uk/            CREST http://www.dtcc.com/                 Depository Trust & Cle...
Industry Websites http://www.iosco.org/iosco.html        International Organ Securities Commission http://www.ipma.org.u...
Industry Websites http://www.exchange-handbook.co.uk/Exchange Handbook http://www.investorwords.com/        Glossary ht...
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23512555 trade-life-cycle

  1. 1. Life Cycle of a TradeTraining Academy
  2. 2. Introduction Facilitator Self Course Outline Break Timings  15 mins – Forenoon  45 mins – Lunch  15 mins – Afternoon ExpectationsPage 2
  3. 3. ExpectationsStatic dataHow trade is bookedSettlement and before settlementTrade booking and settlementImpact of incorrect settlementPre-matching before a settlementEntire life of a tradeFront office & middle officeHow trade is entered and how it is bookedPage 3
  4. 4. What is your Idea of Life Cycle of a trade ??Page 4
  5. 5. Section OneThe Market Participants
  6. 6. The Market Participants - Facilitators Brokers Dealers Investment Banks Stock Exchanges Agents Securities Trading Organisations Custodians Clearing Banks RegulatorsPage 6
  7. 7. The Market Participants - Investors Institutional Investors Mutual Funds (Unit Trusts) Pension Funds Insurance Companies Hedge Funds Charities Individual InvestorsPage 7
  8. 8. The MarketplacePage 8
  9. 9. Markets & Stock ExchangesA Market is an environment in which securities arebought and sold. Central to some market places is theStock Exchange. Trades executed over an Exchange are executed “On- Exchange” or “Exchange Traded” Other trades executed over the telephone are “OTC” (Over the Counter) or Non-Exchange Traded Each securities market has an associated and recognisable place to effect settlement  E.g. French Government Bonds traded on the Paris Bourse settle in EuroclearPage 9
  10. 10. Stock ExchangesRegion Country Financial Stock Exchange CentreEurope UK London London Stock Exchange (LSE) London Metal Exchange London International Financial Futures & Options Exchange (LIFFE) Germany Frankfurt Deutsche Bourse Spain Madrid Bolsa de Madrid Asia China Hong Kong Stock Exchange of Hong KongPacific Hong Kong Futures Exchange China Shenzhen Shenzhen Stock Exchange Shanghai Shanghai Stock Exchange Japan Tokyo Tokyo Stock Exchange Tokyo International Financial Futures Exchange (TIFFE) Singapore Singapore Stock Exchange of Singapore Singapore International Monetary Exchange (SIMEX) Australia Sydney Australian Stock Exchange (ASX)America USA New York New York Stock Exchange (NYSE) Chicago Chicago Stock ExchangePage 10
  11. 11. Other Market Participants Salespeople Data Providers Registrars Coupon Paying Agents Trade Matching Services Settlement Instruction Communication MechanismsPage 11
  12. 12. Market Participants - IssuersOrganisations occasionally need to raise cash/capital to expandtheir businesses by: Selling part ownership issuing shares or equity Borrowing cash from investors issuing debt in the form of bonds Type of Issuer Example Corporations Vodafone (UK) Sovereign Entities Kingdom of Denmark Local Governments City of London Government Agencies Federal National Mortgage Association Supranational Organisations International Bank for Reconstruction & Development (World Bank – IBRD)Page 12
  13. 13. Where does Deutsche Bank fit?Deutsche covers multiple functions: Broker Dealer Fund/Asset Manager Investment Bank Issuer Global Custodian Retail BankPage 13
  14. 14. So far CoveredI. Market ParticipantsPage 14
  15. 15. Section TwoStatic Data
  16. 16. What is Static Data?Static Data is the common term to describe the store ofinformation used to determine the appropriate actionsrequired for successful processing of each trade.For Example: Trading Entities Trading Books within each entity Counterparties Instruments Currencies PricesPage 16
  17. 17. Sources of Static Data Where possible, financial institutions try and create a core of “Golden Source” static data to avoid data conflicts in inter-dependent systems Companies specialise in gathering and distributing financial data to institutions via:  Electronic File Feeds  Internet  Through on site terminals.Page 17
  18. 18. Security Data Providers or Data Vendors Reuters Bloomberg Telekurs Rolfe & Nolan SWIFT DTCC Alert Direct/OMGEO Standard and Poors Euroclear Wallstreet SIAC NSCCPage 18
  19. 19. Counterparty Static Data Name, Address & Contact Details Authorized Credit Limits Related Companies Standard Settlement Instructions Date of account set up Type of Institution Documentation signed Tax Status Registered Representative Confirmation Details  Fax, Telex, Electronic Trade Confirmation, SWIFT, EmailPage 19
  20. 20. Instrument Static Data Type of instrument  Equity, Bond, Warrant, Derivative, Commodity Issue  Short Name, Long Name, Size, Denomination, Issuer Coupon Dates  Coupon Rate, Payment Characteristics - 30/360, A/360 etc Alternative/External References,  ISIN, Common Code, RIC, Quick Code, Cusip etc Exchange Currency Maturity Date FactorsPage 20
  21. 21. Maintaining Static DataIncorrect static data causes many processing errors: Delayed Confirmations Unmatched Transactions Settlement Failure Incorrect Fee calculations Incorrect Profit & Loss Calculation Poor Reporting (Regulatory & risk impact) Increased cost per transaction due to reduced STPIncorrect static data leads to reduced service anddissatisfied customers.Page 21
  22. 22. Static Data Summary Bad Static Data results in reduced service levels to clients due to processing hold-ups and possible trade failure Bad Static Data impacts operational risk and increases the cost per trade processed Bad Static Data contributes to poor internal & external reporting impacting risk & reputation Static Data will continue to be an important dependency on the efficient processing of trades especially as the trade lifecycle window becomes smaller STATIC DATA  Must be populated correctly within all of the relevant systems.  Must be obtained from a credible source as timely as possible.Page 22
  23. 23. So far CoveredI. Market ParticipantsII. Static DataPage 23
  24. 24. Section ThreeTrade Execution & Trades Processing
  25. 25. Straight Through ProcessingPage 25
  26. 26. 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.Page 26
  27. 27. The Front Office Trading Sales Broking Corporate Finance Repo DeskPage 27
  28. 28. Why Trade? Speculate  Profit from price move or increase in value of the asset. Accumulate  Benefit from dividend on shares and interest on bonds. Hedging:  To speculate and accumulate.  To reduce risk.Page 28
  29. 29. Trade ExecutionTrade execution tends to operate in one of three wayswhere sellers and buyers execute trades: Trading Floor  Traditional method of trading – face to face on the trading floor of a Stock Exchange. Computerised Exchanges  Established in the UK as part of the Big Bang in 1986. This term applied to the liberalization of the London Stock Exchange (LSE) when Trading was automated. TelephonePage 29
  30. 30. Trade ExecutionFurthermore Trades can be: Quote Driven  Market Makers quote prices via computerised screens showing the 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.  Xetra (Germany) SETS (UK) SEATS (Australia) Electronic Communications Networks (ECN)  ECN’s operate on an electronic basis only.  Euro-MTS Brokertec ArchipelagoPage 30
  31. 31. Trade CaptureRegardless of the trade execution/origin, all trades must berecorded 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 managementTraders use complex trading systems to facilitate trading & positionmanagement, trade processing is usually done via Back Officeprocessing systems.Page 31
  32. 32. Front Office Trade Detail Trading Book Trade Date Deal Time Value Date Operation (e.g. Buy/Sell, Lend/Borrow, In/Out) Quantity Instrument/Security Price CounterpartyPage 32
  33. 33. 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.Page 33
  34. 34. 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.Page 34
  35. 35. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & Trades ProcessingPage 35
  36. 36. Section FourTrade Confirmation
  37. 37. 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.Page 37
  38. 38. Trade MatchingTrade Matching generally applies to mandatoryelectronic 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 Corporation’s Trade Matching Service. (NSCC)Page 38
  39. 39. Trade AffirmationTrade Affirmation relates to the electronic matching of trade detailstypically 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:  Omgeo’s Oasys Global system.  FIX – (Global)  Oasys Domestic - (US)  DTC ID (Institutional Delivery) – (US)Page 39
  40. 40. SummaryBasic Principles The longer a trade’s 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.Page 40
  41. 41. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationPage 41
  42. 42. Section FiveTrade Instruction
  43. 43. Settlement InstructionsSettlement Instructions are used to communicate themovement 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).Page 43
  44. 44. Instruction ContentSettlement Instructions tell the custodian/Agent to carryout 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.Page 44
  45. 45. Instruction Communication MethodsS.W.I.F.T. Proprietary Messaging CREST  CREST DTC  DTC Euroclear  Euclid (for Euroclear) Clearstream  Cedcom (for Clearstream) Agent Banks CustodiansPage 45
  46. 46. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV. Trade InstructionPage 46
  47. 47. Section SixInstruction/Agent Matching
  48. 48. Why do we match instructions?To reduce settlement risk by: Increasing the chances of trade settlement on value date Resolving differences between trades and counterparties Enabling accurate funding of cash in nostro accounts Managing stock inventory in depositoriesPage 48
  49. 49. Matching at The Settlement AgentOnce Instructions have been received at the Custodian,the next lifecycle steps include: Instruction Matching  Custodian attempt to match the instruction to the counterparty instruction. Status Update  Attachment of the current status of the instruction. (matched/unmatched/unknown). Unmatched Resolution  Investigation and resolution of non-matching instructions. Trade Settlement  Updating the current status within the securities trading organisation’s books and records.Page 49
  50. 50. Instructions Matching: Example 1 Instructions sent in by Securities House and Counterparty. 2 Instruction matching occurs. 3 Status is recorded. 4 Instruction Status (Matched/Unmatched) is sent back to both parties.Page 50
  51. 51. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV. Trade InstructionVI. Instruction / Agent MatchingPage 51
  52. 52. Section SevenTrade Settlement
  53. 53. Settlement TerminologyTrade settlement is the act of exchanging securities andcash 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.Page 53
  54. 54. Settlement ConsiderationsHow to ensure trade settlement Ensure the seller holds the required level of securities at the correct custodian.  Some securities can settle at more than one location. Ensure the purchaser has sufficient cash to make the payment.  The purchaser may aggregate balances over a number of accounts, the total amount must cover the amount required. (Funding).  The purchaser may have a credit agreement with the custodian who will cover the cash shortfall. (Secured credit line/Overdraft).  The purchaser may have a collateral agreement whereby collateral is held in the account to offset any non return of funds. (Margin)Page 54
  55. 55. Types of Settlement Full Settlement Partial Settlement Securities Only Cash Only Cross Currency Settlement Net SettlementPage 55
  56. 56. SummaryTimely settlement of trades is an important part of theTrade Lifecycle with implications across the followingareas: Inventory Management Cash Management Settlement Risk Cost Management Firm ReputationPage 56
  57. 57. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV. Trade InstructionVI. Instruction / Agent MatchingVII. Trade SettlementPage 57
  58. 58. Section EightPosition/Inventory Management
  59. 59. Inventory ManagementManagement of the stock holding is an integral part oftrade settlement: Inventory Management ensures:  The correct amount of securities (nominal) are available  At the correct location (depot).  At the correct time (on value date).Page 59
  60. 60. Methods of Inventory ManagementIf securities are unavailable we can consider the following: Internal Book Transfer.  Borrow securities from another firm account same depot. Realignment.  Borrow securities from another firm account different depot. Stock Borrow Loan Trade.  Borrow the securities from the market. Autoborrow.  Borrow the securities from the custodian/central depository. Execute a Repurchase Agreement (Repo) Do nothing and let the trade fail.Page 60
  61. 61. Inventory & Funding ManagementPage 61
  62. 62. Automated Lending & BorrowingService provided by large Custodians and CentralSecurity Depositories: Borrowers  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.Page 62
  63. 63. How do Trades & Positions get updated? Automated Updates  Instruction statuses are sent in by the custodian (fully settled, 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  In some cases it may be necessary to settle trade manually and a settlements specialist may manually record the update against the trade record.Page 63
  64. 64. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV. Trade InstructionVI. Instruction / Agent MatchingVII. Trade SettlementVIII. Position / Inventory ManagementPage 64
  65. 65. Section NineFails & Fail Management
  66. 66. Failing Trades and their Impact A failed trade is any securities transaction that does not settle on value date. The buyer and seller are impacted by settlement failure:  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)Page 66
  67. 67. Why Trades Fail Instructions not received by custodian Instructions remain unmatched on value date Insufficient cash, collateral, credit line Insufficient securitiesPage 67
  68. 68. The Importance of Managing Fails Fails will have cash implications  Interest claims on fails to receive.  Interest expense on fails to deliver. Fails make the reconciliation of corporate actions difficult which can lead to material losses Regulatory Impact - In some markets fines are imposed for late trade settlement  Australia – Fines are imposed daily from value date to settlement date for trades executed on the Australian Stock Exchange.  UK - Fines are imposed by CREST from a member’s failure to achieve pre-defined settlement targets.Page 68
  69. 69. 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.Page 69
  70. 70. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV. Trade InstructionVI. Instruction / Agent MatchingVII. Trade SettlementVIII. Position / Inventory ManagementIX. Fails & Fail ManagementPage 70
  71. 71. Section TenReconciliations
  72. 72. What are Reconciliations Reconciliations exist to check the accuracy of the firms books and records:  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 basisPage 72
  73. 73. Why do we monitor reconciliations? Regulatory Managing Risk Corporate ActionsTypes of Reconciliations Position Reconciliations Trade Reconciliations System ReconciliationsPage 73
  74. 74. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV. Trade InstructionVI. Instruction / Agent MatchingVII. Trade SettlementVIII. Position / Inventory ManagementIX. Fails & Fail ManagementX. ReconciliationsPage 74
  75. 75. Section ElevenClearing and Custody
  76. 76. Types of Custodian 1Term Description ExampleCustodian An organisation that holds securities Deutsche Bank and cash on its clients’ behalf and Domestic Custody may effect trade settlement on its Services clients’ behalf.Global Custodian As per custodian, but has a network State Street of local (or sub-custodians) that hold Citigroup securities and cash and effect trade settlement on behalf of the global BoNY custodian. ParibasLocal Custodian A custodian that operates within a Credit Lyonnais Paris specific financial centre. Banco Espirito Santo LisboaSub-Custodian A custodian within a Global Citibank Milan Custodian’s network of custodians. Citibank MadridPage 76
  77. 77. Types of Custodian 2Term Description ExamplesCentral Securities An organisation that hold securities, DTC (USA)Depository (CSD). normally in book entry form; usually CREST (UK & Eire) the place of settlement, effected through book transfer. JASDEC (JPY) A CSD that handles domestic CCASS (HK) securities of the country in which it is located.National CentralSecuritiesDepository (NCSD)International A CSD that handles domestic and EuroclearCentral Securities international securities. (Brussels)Depository (ICSD) Only two organisations are Clearstream recognised as ICDS’s. (Luxembourg)Settlement Agent An organisation that effects the Citibank MilanPage 77 exchange of securities and cash on Citibank Madrid
  78. 78. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & ProcessingIV. Trade ConfirmationV. Trade InstructionVI. Instruction / Agent MatchingVII. Trade SettlementVIII. Position / Inventory ManagementIX. Fails & Fail ManagementX. ReconciliationsXI. Clearing & CustodyPage 78
  79. 79. What is a Corporate Action?Any action by an Issuer which may affect the investor: The distribution of benefits to existing shareholders or bondholders  Coupon Payments  Cash Dividends  Stock Dividends A change in the structure of an existing security  Stock Split  Bonus Shares A notification that may or may not require a response from the securities owner  Annual Meeting  Voting RightsPage 79
  80. 80. Section TwelveTrade & Position Accounting
  81. 81. ControllingThe accounting group within the bank is responsible forcorrectly recording and monitoring all of the financialtransactions occurring within the Securities TradingHouse:Deutsche Bank Controllers include: Legal Entity Controller (LEC)  Responsible for DB Companies. Business Area Controller (BAC)  Responsible for product lines and the Business. Central Functions – Risk Controlling  Responsible for Managing Risk across the all divisions centrally.Page 81
  82. 82. 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 activityPage 82
  83. 83. Example Control Reports Reconciliations Profit and Loss Statement (P&L) Balance Sheet Reporting (BS) Buy and Hold Reporting (B&H) Management Information Reporting (MIS) Credit Risk Reporting (CRES)Page 83
  84. 84. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & Processing XI. Clearing & CustodyIV. Trade Confirmation XII. Trade & Position AccountingV. Trade InstructionVI. Instruction / Agent MatchingVII. Trade SettlementVIII. Position / Inventory ManagementIX. Fails & Fail ManagementX. ReconciliationsPage 84
  85. 85. Section ThirteenRegulatory & ComplianceResponsibilities
  86. 86. RegulatorsRegulatory authorities exist within the securitiesindustry 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 practicePage 86
  87. 87. 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.Page 87
  88. 88. Financial Regulatory Authorities Country Regulatory AuthorityAustralia Australian Securities & Investments Commission Prudential Regulatory AuthorityBahamas Bahamas Central BankFrance Commission des Operations de Bourse Banque de FranceHong Kong Securities & Futures Commission Monetary AuthorityJapan Financial Supervisory Agency Financial Reconstruction CommissionSingapore Monetary Authority of SingaporeUK Financial Services Authority (FSA)USA Securities & Exchange Commission (SEC) US Commodity Futures Trading Commission National Futures AssociationPage 88
  89. 89. Reporting MethodsA number of methods exist dependent on how the localRegulator 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 RegulatorPage 89
  90. 90. ComplianceCompliance is the Bank’s 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 TradingPage 90
  91. 91. So far CoveredI. Market ParticipantsII. Static DataIII. Trade Execution & Processing XI. Clearing & CustodyIV. Trade Confirmation XII. Trade & Position AccountingV. Trade Instruction XIII. Regulatory &VI. Instruction / Agent Matching ComplianceVII. Trade SettlementVIII. Position / Inventory ManagementIX. Fails & Fail ManagementX. ReconciliationsPage 91
  92. 92. Section FourteenConclusions
  93. 93. 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 efficiencyPage 93
  94. 94. Section FifteenReferences
  95. 95. Recommended Reading Michael Simmons  Securities Operations – A Guide to Trade & Position Management Stephen Valdez  An Introduction to Western Financial Markets David Dasey  An Introduction to Equity Markets Moorad Choudhry  An Introduction to Repo Markets Robert Hudsen  Treasury Management Financial Engineering  The Handbook of Equity Derivatives Oxford paperbacks  Dictionary of Finance & BankingPage 95
  96. 96. Industry Websites http://www.crestco.co.uk/ CREST http://www.dtcc.com/ 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/ Securities Exchange Commission http://www.nasdaq.com/ 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/ London Clearing House http://www.liffe.com/ International Financial Futures & Options ExchangePage 96
  97. 97. Industry Websites http://www.iosco.org/iosco.html International Organ Securities Commission http://www.ipma.org.uk/ International Primary Market Association http://www.isda.org/index.html International Swaps & Derivatives Association http://www.isla.co.uk/ International Securities Lending Association http://www.isma.com/home.html International Securities Market Association http://www.liba.org.uk/ London Investment Bank Association http://www.lsta.org/ Loan Syndic Trading Association http://www.sia.com/ Securities Industry Association http://www.securities-institute.org.uk Securities Institute http://dspace.dial.pipex.com/jhalsey/ Compliance Exchange http://www.world-exchanges.org/ Federation of Exchanges http://www.trioptima.com/tri/ OTC Derivatives termination service http://www.finanz-adressen.de/WE-fin-regulatory.html Financial Regulatory AuthoritiesPage 97
  98. 98. Industry Websites http://www.exchange-handbook.co.uk/Exchange Handbook http://www.investorwords.com/ Glossary http://www.stpforum.com/ STP Forum http://www.stpinfo.com/ STP Info http://www.afponline.org/ Association for Financial Professionals http://www.calpers.ca.gov/index.jsp?bc=/investments/straightthrough.xml Virtual Matching Utilities (VMUs); http://www.omgeo.com/ OMGEO http://www.sungard.com/ Sungard SystemsPage 98
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