Trade And Settlement Process

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Trading has changed from local to global and so have the processes from paper to Online. The result is change in process from T+3 to T+1 and real time trading and settlement of a trade.

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  • Presentation on Financial Services IT – Back Office Operation for Course 683 By Sri Averneni, Kartik Mehta Source for picturs: Google images
  • Market crash - Year 1987, Location Wall Street. Black Monday's collapse - by far the biggest one-day stock market fall in history. Black Monday was the most dramatic in a huge list of horrible days on the market - many of which are now forgotten. Among the nastiest was 27 October 1997, when a basically bullish market started to be rattled by mounting worries over emerging markets, especially debt-laden Asia. In one day, the Dow lost 550 points, checked only by the circuit-breaker system put in place after 1987. The market continued to be a little frisky thereafter - especially in light of the later collapse of the Russian economy and the multi-billion dollar failure of the LTCM hedge fund. Source: 1. http://www.group30.org/ 2. BBC News
  • Source: Tower Group/SIA Survey, Technology Trends in the Securities Industry 1999: Transition to an Online World
  • Source: Googl images
  • Graphics are taken from google images, concept developed by Kartik and Sri for the presentation
  • Source: Netik – mass automation of financial services:
  • http://en.wikipedia.org/wiki/Settlement_(finance) Traditional settlement Traditionally, securities settlement has involved the physical movement of paper instruments, or certificates and transfer forms. Payment was usually made by cheque. It was also risky, inasmuch as paper instruments, certificates, and transfer forms were relatively easy to lose, steal, and forge (see indirect holding system). the United States markets experienced what has become known as "the paper crunch," as settlement delays threatened to disrupt the operations of the securities markets. This led to the formation of the Depository Trust Company (DTC), and ultimately its parent, the Depository Trust & Clearing Corporation. In the United Kingdom, the weakness of paper-based settlement was exposed by a programme of privatisation of nationalised industries in the 1980s, and the Big Bang of 1986 led to an explosion in the volume of trades, and settlement delays became significant. In the market crash of 1987, many investors sought to limit their losses by selling their securities, but found that the failure of timely settlement left them exposed. Electronic settlement The electronic settlement system came about largely as a result of Clearance and Settlement Systems in the World's Securities Markets , a major report in 1989 by the Washington-based think tank, the Group of Thirty. This report made nine recommendations with a view to achieving more efficient settlement. This was followed up in 2003 with a report called Clearing and Settlement: A Plan of Action[1] with 20 recommendations. In an electronic settlement system, electronic settlement takes place between participants. If a non-participant wishes to settle its interests, it must do so through a participant acting as a custodian. The interests of participants are recorded by credit entries in securities accounts maintained in their names by the operator of the system. It permits both quick and efficient settlement by removing the need for paperwork, and the synchronisation of the delivery of securities with the payment of a corresponding cash sum (called delivery versus payment, or DVP). The recent development of electronic securities trading has brought about settlement pressures akin to the paper crunch of the 1970s and 1980s, rendering the need for further efficiencies urgent.
  • Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
  • Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
  • Picture 1: http://www.cartoonstock.com/lowres/hsc3590l.jpg Picture 2: http://www.cartoonstock.com/lowres/vsh0492l.jpg Many paper reports were being printed each day with hardly anybody was reading them. The programs that produce reports were hard-coded; once report was generated, the user can not ask for more information ie fields in excel sheets or manipulate the excel sheet reports to fit their needs and the client’s inquiries about their product. Thus, UBS business end user was unable to provide all the relevant information required by the client at one go leading to loss of time, energy and employee’s work load each day. Most printed reports had a lag of one day or more plus wastage of paper, manpower and cost of distribution. Additional work force had to be allocated to ensure that Excel worksheets are getting faxed to right people and the right people are getting them because all these reports had client’s Social Security number’s or Tax id and personal information. Any pilferage of client’s information could mean breach of privacy of client’s data and that could land UBS in big soup. Organisation in above situation had Information. But, what was lacking is organized and analysed data.
  • Source: www.swift.com/index.cfm?item_id=3878 Bank not only has to take of care of transactions held in the bank but also the transactions the bank has with Corresponding banks and financial institutions. That cannot happen when bank’s different division, say, Asset Management interacts with Corresponding bank’s Asset management division. For Anti Money Laundering activities, Integration of Bank’s different division is must. This would enable a central agency, single point of contact, with external world, be it any financial institution or regalator. This way bank would be able to monitor bank’s external transactions.
  • Only pictures copied from Images in Google, rest concept and diagram drawn using MS Power point are my own creation. Change in approach has its direct bearing on the way of governance of Bank’s traditional processes. They too require a change To be able to meet Proactive risk management approach of the bank. Change process – Transactions, Exchange of financial services and products need to change from merely Information gathering and building A elephant of Information to Intelligence gathering. For the same, Integration of the process, of the system is a pre-requisite.
  • Only pictures copied from Images in Google, rest concept and diagram drawn using MS Power point are my own creation. Change process – Transactions, Exchange of financial services and products need to change from merely Information gathering and building A elephant of Information to Intelligence gathering. This makes for Centralised Intelligence gathering system which in turn helps the bank develop Financial Intelligence needed about Each and every of its customer as well as each and every transaction made by the Bank’s customer or corresponding bank’s customer. For the same, Integration of the process, of the system is a pre-requisite.
  • Hierarchy based org Structure : As is to Services, Product line based org Structure: To Be Hierarchy decreases and collaborative work gain more prominence because work load is higher and problem is more complex requiring feedback across the various divisions of the organisation.. Office boy transferring files, doing faxes to Internet & Intranet connection to transfer file, paper thereby reducing manual work and increasing work done on Internet & Intranet.
  • Source: Netik – mass automation of financial services
  • Source: Presentation on STP at Mumbai Stock Exchange
  • New system merges data from multiple sources, thereby, preventing data loss and disintegration. 1. Market data (pricing, fundamentals, news, corporate act, etc.) 2. Front office (indications, pricing, risk, trends, etc.) 3. Back office (accounts, inventory, settlement, etc.)
  • Source: power point from google
  • Source: Netik – mass automation of financial services
  • Source: Netik – mass automation of financial services
  • Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
  • Source: Netik – mass automation of financial services
  • Source diagram: IBM
  • Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
  • Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
  • Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
  • ** Only graph of slide taken from IIT Professor S.Seshadari’s slide, inputs and details are my own understanding of working of bank. Pre-requisite for Money Laundering Analysis Across Bank’s various Divisions for Analysis to happen is : Centralisation of all the Data, Transactions, Client details of the various divisions of the bank. Once bank has a control of what is Internal transactions and what are External transactions can the bank run analysis. Why is it necessary? In the new system aim is to merge the data from multiple sources in order to prevent data loss and data disintegration. 1. Market data (pricing, fundamentals, news, corporate act, etc.) 2. Front office (indications, pricing, risk, trends, etc.) 3. Back office (accounts, inventory, settlement, etc.) Once data is Centralised only then all the data can be stored at a Data Store ie Data Ware house and only then an analysis can be done. Hence, first goal, even before thinking of Money Laundering analysis is centralisation of all various divisions of the banks.
  • Images from google images while Analysis and concept of diagram done by Kartik and Sri for the presentation based on understanding developed during the course
  • Notes: CVMU plays a major role in implementing T +1 It will be centralized and the firms will have a membership as like Clearing corp. membership. CVMU will be regulated so that there will not be a monopoly issue.
  • Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
  • Majority of sources we have tried to quote but some might have not been quoted because we did did extensive research and for whole gamut of data lost few of data sources.
  • Trade And Settlement Process

    1. 1. T+1 and real time Trade Settlement Process
    2. 2. Why setting the course for T+3 in 1996 Original G30 Recommendations (1989) Recommendation VII “ All markets should adopt a rolling settlement system. Final settlement should occur no later than T+3.” IOSCO Recommendations (2001) Recommendation 3 – Settlement Cycles “ Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter that T+3 should be evaluated.” USA moved from T+5 to T+3 in 1996. UK and most of Europe moved to T+3 in 2001.
    3. 3. Why idea of STP for T+1 and real time trade processing gaining currency <ul><ul><li>Volumes - Trading volumes continue to increase, straining manual processing capabilities and creating diseconomies of scale and risk management concerns. </li></ul></ul><ul><ul><li>Competition - Lower barriers to entry and increased competition are driving market participants to differentiate themselves by providing value-added services and more diverse and customized product offerings </li></ul></ul><ul><ul><li>Margin Pressure – Margins are continuing to be squeezed, creating increased cost pressures. </li></ul></ul><ul><ul><li>Customer Expectations - Clients are demanding increased processing speed and information. They expect a zero information latency environment. </li></ul></ul><ul><ul><li>Industry Standards - Industry data standards and messaging protocols (i.e., FIX, ISIN, ISO 15022, XML) are being pushed out. </li></ul></ul>Source: Tower Group/SIA Survey, Technology Trends in the Securities Industry 1999: Transition to an Online World
    4. 4. Traditional Trade cycle process
    5. 5. Traditional Trade Process cycle Pre-Trade Compliance Order Management Price Discovery Exchange Execution Custodian Records Settlement / Accounting Order Generation Broker Dealer Order Generation Order Generation
    6. 6. Research Document Management Analytics Calculation Framework Trading Transaction Management Risk Risk Management Back Office Settlement Systems Treasury General Ledger / Accounting Treasury Treasury Management CRM Sales Trade/Order Management Clearing & Custodians Operations Data Management Multiple Business Departments and Institutions: Traditional settlement processes Trade Cycle Each department depended On information provided by its Predecessor.
    7. 7. Traditional Trade floor <ul><ul><li>Different departments – Fax, phones are used to communicate between the different departments of the trade floor. </li></ul></ul><ul><ul><li>Silos of individual departments ie Multiple departments and no point of integration. Thus, they are not able to talk to each other. Thus, they are unable to share information. These exists small group of Islands of information but no bridges for traffic to flow, though each one is dependent on other for want of information. This causes unwanted delays. A centralised system could reduce this dependency. </li></ul></ul><ul><ul><li>Multiple dependencies – Message to Client to Broker Dealer is based on Fax, telephone and could get lost. </li></ul></ul><ul><ul><li>Message from Broker Dealer to deal maker could get lost because again the system is based on Fax and Telephone and one only hopes that Client details do not get lost in the huge bulk of paper and daily operations at the Broker’s office. </li></ul></ul><ul><ul><li>Trade maker is dependent on Fax boy sending right fax, fax machine working fine, receiver of fax at their desk, receiver forwards the fax to the right reporter. </li></ul></ul><ul><ul><li>More the amount of paper the are the chances of paper getting lost and Transaction getting delayed or important information of the client or market rate or broker details getting lost. </li></ul></ul><ul><ul><li>High degree of dependency on paper, administrative works of all the shareholders involved and loss of paper can result in the whole process coming to a halt and collapse. </li></ul></ul><ul><ul><li>A Intranet for integrating all the different departments can reduce the delays. </li></ul></ul><ul><ul><li>Disadvantages </li></ul></ul><ul><ul><li>Though Trade floor operations distributed, since most work done on paper, but piles of paper that need to be analyzed by each department and each department is dependent on another before ay trade can be processed. Hence, individual delay in getting information and analysis takes up group’s time and group delay of the whole process. </li></ul></ul><ul><ul><li>Communication from its Client ordering buying or selling of a share ie start of the process to change in owner’s rights on a share ie destination of a share takes a lot of time. </li></ul></ul>
    8. 8. Issues in Process flow <ul><ul><li>Redundant flow of non essential data in institutional transaction processing involving broker/dealer and their customers </li></ul></ul><ul><ul><li>Lack of automation and common messaging standards between broker/dealers and their customers leading to errors and discrepancies </li></ul></ul><ul><ul><li>Increasing costs due to redundant and manual steps resulting from the lack of common standard interface and inter operability </li></ul></ul><ul><ul><li>Growing volume in global securities trading is a challenging task and will grow even more difficult as the volume of the trading of securities increases, something that is inevitable with globalisation. </li></ul></ul>
    9. 9. <ul><li>RISKS AT SETTLEMENT </li></ul><ul><ul><li>Principal Risk: </li></ul></ul><ul><li>Growing risk of loosing securities or payments made to defaulting party before the detection of default. </li></ul><ul><ul><li>Liquidity Risk: </li></ul></ul><ul><li>Increasing risk due to sellers of securities not receiving payments when due or the buyers who do not receive delivery when it is due. </li></ul><ul><ul><li>Operational Risk: </li></ul></ul><ul><li>The risks resulting from inefficiencies in information systems, management failures and human errors due to insufficient capacity unable to meet the growing global securities trading. </li></ul>Trade floor - Risks for shareholder in current system
    10. 10. Change in Business Strategy As Is To Be
    11. 11. Pre requisites for Integrated approach to trade processing: centralisation of information collection process: As Is To Be … to Centralised information source on correspondent banks From … Numerous bilateral information exchanges within financial institutions Source: www.swift.com/index.cfm?item_id=3878
    12. 12. Current Key Processes – As Is Brokerage Asset Management Private Banking Investment Banking Institutional investors ** Above Pictures taken from Google Images
    13. 13. Future Key Processes – To Be Brokerage Asset Management Private Banking Investment Banking Institutional investors ** Above Pictures taken from Google Images
    14. 14. Change in Organisational structure As Is To Be Hierarchy based org Structure Services, Product line based org Structure
    15. 15. Intranet: Trade Process goes Online Trade Cycle Decision Support Performance Attribution Order Generation Pre-Trade Compliance Order Management Price Discovery Execution Recs Settlement / Accounting ETC ETS
    16. 16. Trade floor design by STP Exchange VMU / ETCP Trade Date Space 1 Pre-trade / Trade Space 3 Clearing & Settlement Order Trade IMI: Investment Manager B/D: Broker Dealer VMU: Virtual Matching Utility GC: Global Cust SC: Sub-Cust SA: Settlement Agent (Clearer) CCP: Central Counterparty ICSD: (Int‘l) Central Securities Depository Institutional (buy) Side Street (sell) Side Space 2 Post Trade / Pre-Settlement Trade Date + X GC SA CCP SA IMI B/D (I)CSD SC B/D Space 4 - Custody Services Non Trade Related Activity 1 2 3
    17. 17. To Be - Trade cycle
    18. 18. New Process Exchang e Electronic Communications Network Market Maker Firm Internalizes Order Internet order Phone order [1] http://www.ibtimes.com/articles/20061006/add-nyse-electronic-trading.htm
    19. 20. Trade Floor Sequence diagram GSTPA TFM Fund Manager Broker Custodian DTC/CSD Order Notification BON NOE Trade Match Trade Match Allocations Allocations Allocation Notification Net Proceeds Net Proceeds Net Proceeds Match Net Proceeds Match Net Proceeds Match Settlement Details Settlement Details Settlement Details Match Settlement Details Settlement Details Match Settlement Details Upload Confirms Affirm Trades Upload Affirms Release Cash
    20. 21. Straight Through Processing <ul><ul><li>Automated </li></ul></ul><ul><ul><ul><li>Removal of paper </li></ul></ul></ul><ul><ul><ul><li>No manual re-keying </li></ul></ul></ul><ul><ul><ul><li>Control of workflow </li></ul></ul></ul><ul><ul><li>End-to-end </li></ul></ul><ul><ul><ul><li>Transaction initiation, repair, tracking, management, reporting </li></ul></ul></ul><ul><ul><li>Integrated </li></ul></ul><ul><ul><ul><li>Front to back </li></ul></ul></ul><ul><ul><ul><li>In house with market infrastructure </li></ul></ul></ul><ul><ul><ul><li>External service providers </li></ul></ul></ul><ul><ul><li>Managed by exception </li></ul></ul><ul><ul><ul><li>Alerts </li></ul></ul></ul><ul><ul><ul><li>Repair facilities </li></ul></ul></ul><ul><ul><ul><li>STP rates & statistics </li></ul></ul></ul>Characteristics of an STP solution:
    21. 22. <ul><ul><li>Technology </li></ul></ul><ul><ul><li>Increase automation (STP) </li></ul></ul><ul><ul><li>Real-Time functionality </li></ul></ul><ul><ul><li>Timing </li></ul></ul><ul><ul><li>Impose deadlines and penalties </li></ul></ul><ul><ul><li>Confirmation by Money Managers </li></ul></ul><ul><ul><li>Send allocations for each partial fill </li></ul></ul><ul><ul><li>Data </li></ul></ul><ul><ul><li>Standardize data </li></ul></ul><ul><ul><li>Common data source/ matching utility </li></ul></ul><ul><ul><li>For Investors (especially small): </li></ul></ul><ul><ul><li>Improved service, reduce risk and increase liquidity. </li></ul></ul><ul><ul><li>For Market participants: </li></ul></ul><ul><ul><li>Reduce credit risk by two thirds, reduce operational risk, improve liquidity </li></ul></ul><ul><ul><li>Competitive advantage: </li></ul></ul><ul><ul><li>Lower costs for your clients as your own costs have been reduced </li></ul></ul><ul><ul><li>Efficient Trade processing: </li></ul></ul><ul><ul><li>T+3, T+1 not only as a way of shortening the settlement period, but as an opportunity to construct a sophisticated network-based back office system that supports efficient trade processing by organically linking trades and all the parties concerned by advanced electronic means of communication. </li></ul></ul>Advantages of Switching to New Trade floor Design
    22. 23. Vendor Business Drivers <ul><ul><li>The bottom line </li></ul></ul><ul><ul><li>Competition </li></ul></ul><ul><ul><li>Time to market </li></ul></ul><ul><ul><li>Reduce development costs </li></ul></ul><ul><ul><li>Standards compliance </li></ul></ul><ul><ul><li>STP features & functions </li></ul></ul><ul><ul><li>Service to customers </li></ul></ul><ul><ul><li>Reliability & scalability </li></ul></ul><ul><ul><li>Available technology </li></ul></ul>
    23. 24. Technology Is Just the Visible Part Country X Technology User Skills Security and Privacy Processes Design Culture Organizational Structures Source: IBM <ul><ul><li>Human side of change is where the real challenges lay </li></ul></ul><ul><ul><li>Technology only plays the role of an enabler </li></ul></ul>
    24. 25. <ul><li>There are several challenges in implementation of faster Trade cycle from different perspectives: </li></ul><ul><li>Communication: </li></ul><ul><li>Ensure that all parties involved are informed and aware of Online Trading process changes </li></ul><ul><ul><li>Institutional Transaction processing: </li></ul></ul><ul><li>Overcoming regulatory hurdles to implementing the matching model, i.e. modifying confirm/affirm requirements; implementing new process deadlines. </li></ul><ul><ul><li>Payments processing: </li></ul></ul><ul><ul><li>Obtaining support of banking and broker/dealer community (future technology and rule changes) </li></ul></ul><ul><ul><li>Identification of alternative payment means (proper and secure) </li></ul></ul>Challenges in Implementation Trade floor redesign
    25. 26. <ul><ul><li>Physical securities vs. Dematerialization </li></ul></ul><ul><ul><li>Technical obstacles </li></ul></ul><ul><ul><li>Legal & Regulatory concerns </li></ul></ul><ul><ul><li>Consensus between broker/dealers, transfer agents, and investors </li></ul></ul><ul><ul><li>International/Foreign exchange </li></ul></ul><ul><ul><li>International endorsement </li></ul></ul><ul><ul><li>Changes in fund and trade management </li></ul></ul><ul><ul><li>Transactional and technological changes </li></ul></ul><ul><ul><li>Clearance/Settlement </li></ul></ul><ul><ul><li>Significant changes of processes </li></ul></ul><ul><ul><li>Replace batch processes with real-time and near real-time processes </li></ul></ul><ul><ul><li>Technical infrastructure of real-time processes </li></ul></ul>Challenges in Implementation Trade floor redesign
    26. 27. <ul><ul><li>Standards </li></ul></ul><ul><ul><li>There are two major standards: FIX and SWIFT. Both these are overlapping each other but are still not compatible </li></ul></ul><ul><ul><li>Connectivity </li></ul></ul><ul><ul><li>Firms must continue to electronically connect their internal applications and connect their systems to other firms and the infrastructure </li></ul></ul><ul><ul><li>Vendor Support </li></ul></ul><ul><ul><li>Vendor solutions are not always compatible or easily integrated with other solutions because each vendor provides their services to make a profit and protect its market niche. </li></ul></ul><ul><ul><li>Some of the areas that must be examined are: </li></ul></ul><ul><ul><li>New security issues Retail customer interactivity </li></ul></ul><ul><ul><li>Automated data storage/retrieval </li></ul></ul><ul><ul><li>Utility Development </li></ul></ul><ul><ul><li>Industry utilities, including exchanges, depositories and clearing agencies, are all trying to extend their services to better support their participants, as well as protect themselves from disintermediation </li></ul></ul><ul><ul><li>They must continue to work on solutions such as: </li></ul></ul><ul><ul><li>Eliminating paper by incorporating all instruments into depositories and clearing houses </li></ul></ul><ul><ul><li>Implementing cross collateralization between infrastructure agencies Matching pre-trade and trade information </li></ul></ul><ul><ul><li>Merging with other industry utilities to simplify procedures and reduce costs </li></ul></ul>Steps To Make Trade floor a Reality
    27. 28. Goal: Integration of Exchange wise, Institution wise enabling analysis and business intelligence on trades and settlements made Investment Banking – Europe division Global Wealth Management Fixed Income US division Trading and Settlement Switzerland Division Drill down By city, country Drill down by Financial product Trend analysis By region Granular Details by region City, state, country
    28. 29. Process change – Fax, Telephone to Blackberry Multiple dependencies have now vanished . Share purchaser - Mumbai Back Broker’s office, London Blackberry, Stock Broker, London Blackberry, Price matching brokers, London Broker request to buy stock over phone, blackberry Broker X out of office, Forward his request to his office to check price and availability of particular share Broker X’s office, negotiates for best Share price in market with other broker. Market Broker’s informs about the best deal to Broker X office Broker X’s informs buyer of the best share price available Buyer confirms buying share at said price. Broker X buys shares for buyer at NYSE Electronic Settlement of shares
    29. 30. Centralized -VMU Custodian Broker/ Dealer Institutional Investor Investment Manager Central Virtual Matching Utility (CVMU) Regulators Exchanges
    30. 31. Market trends: US securities market goes global <ul><ul><li>2006 – 2008: </li></ul></ul><ul><ul><li>U.S. Stock Markets tie-up with Global Exchanges </li></ul></ul><ul><ul><li>NYSE's acquires Paris-based Euronext , making history by becoming 1 st Trans - Atlantic Exchange. </li></ul></ul><ul><ul><li>Nasdaq Stock Market Inc. launched a 2.7 billion pounds bid to take over the London Stock Exchange , but fails. </li></ul></ul><ul><ul><li>New York, Tokyo Exchanges Shake Hands on New Alliance that sets the stage for a possible merger or acquisition. </li></ul></ul><ul><ul><li>The New York Stock Exchange sign agreement to buy a 20 percent stake in India's National Stock Exchange. </li></ul></ul><ul><ul><li>New York Stock Exchange's launched expansion of electronic trading in a move to compete with exchanges round the globe. </li></ul></ul>
    31. 32. Net Market Makers Net Market Makers Globalised Securities market In GSA’s Regions GSA Services’ Mega Market Exchange Global Trading Web
    32. 33. <ul><ul><li>Presentation on Financial Services IT </li></ul></ul><ul><li>For Back Office Operation for Course 683 </li></ul><ul><li>By Sri Averneni, Kartik Mehta </li></ul>

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