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See all Premium member Presentation Transcript Life Cycle of a Trade : Life Cycle of a Trade Training Academy Introduction : Page 2 Introduction Facilitator Self Course Outline Break Timings 15 mins – Forenoon 45 mins – Lunch 15 mins – Afternoon Expectations Expectations : Page 3 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 Slide 4: Page 4 What is your Idea of Life Cycle of a trade ?? Section One : Section One The Market Participants The Market Participants - Facilitators : Page 6 The Market Participants - Facilitators Brokers Dealers Investment Banks Stock Exchanges Agents Securities Trading Organisations Custodians Clearing Banks Regulators The Market Participants - Investors : Page 7 The Market Participants - Investors Institutional Investors Mutual Funds (Unit Trusts) Pension Funds Insurance Companies Hedge Funds Charities Individual Investors The Marketplace : Page 8 The Marketplace Markets & Stock Exchanges : Page 9 Markets & Stock Exchanges A Market is an environment in which securities are bought and sold. Central to some market places is the Stock 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 Euroclear Stock Exchanges : Page 10 Stock Exchanges Other Market Participants : Page 11 Other Market Participants Salespeople Data Providers Registrars Coupon Paying Agents Trade Matching Services Settlement Instruction Communication Mechanisms Market Participants - Issuers : Page 12 Market Participants - Issuers Organisations occasionally need to raise cash/capital to expand their businesses by: Selling part ownership issuing shares or equity Borrowing cash from investors issuing debt in the form of bonds Where does Deutsche Bank fit? : Page 13 Where does Deutsche Bank fit? Deutsche covers multiple functions: Broker Dealer Fund/Asset Manager Investment Bank Issuer Global Custodian Retail Bank So far Covered : Page 14 So far Covered Market Participants Section Two : Section Two Static Data What is Static Data? : Page 16 What is Static Data? Static Data is the common term to describe the store of information used to determine the appropriate actions required for successful processing of each trade. For Example: Trading Entities Trading Books within each entity Counterparties Instruments Currencies Prices Sources of Static Data : Page 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. Security Data Providers or Data Vendors : Page 18 Security Data Providers or Data Vendors Reuters Bloomberg Telekurs Rolfe & Nolan SWIFT DTCC Alert Direct/OMGEO Standard and Poors Euroclear Wallstreet SIAC NSCC Counterparty Static Data : Page 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, Email Instrument Static Data : Page 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 Factors Maintaining Static Data : Page 21 Maintaining Static Data Incorrect 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 STP Incorrect static data leads to reduced service and dissatisfied customers. Static Data Summary : Page 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. So far Covered : Page 23 So far Covered Market Participants Static Data Section Three : Section Three Trade Execution & Trades Processing Straight Through Processing : Page 25 Straight Through Processing What is a Trade? : Page 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. The Front Office : Page 27 The Front Office Trading Sales Broking Corporate Finance Repo Desk Why Trade? : Page 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. Trade Execution : Page 29 Trade Execution Trade execution tends to operate in one of three ways where 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. Telephone Trade Execution : Page 30 Trade Execution Furthermore 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 Archipelago Trade Capture : Page 31 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. Front Office Trade Detail : Page 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 Counterparty Trade Validation : Page 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. Trade Enrichment : Page 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. So far Covered : Page 35 So far Covered Market Participants Static Data Trade Execution & Trades Processing Section Four : Section Four Trade Confirmation Trade Confirmation/Agreement : Page 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. Trade Matching : Page 38 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 Corporation’s Trade Matching Service. (NSCC) Trade Affirmation : Page 39 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: Omgeo’s Oasys Global system. FIX – (Global) Oasys Domestic - (US) DTC ID (Institutional Delivery) – (US) Summary : Page 40 Summary Basic 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. So far Covered : Page 41 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Section Five : Section Five Trade Instruction Settlement Instructions : Page 43 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). Instruction Content : Page 44 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. Instruction Communication Methods : Page 45 Instruction Communication Methods S.W.I.F.T. CREST DTC Euroclear Clearstream Agent Banks Custodians Proprietary Messaging CREST DTC Euclid (for Euroclear) Cedcom (for Clearstream) So far Covered : Page 46 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Section Six : Section Six Instruction/Agent Matching Why do we match instructions? : Page 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 depositories Matching at The Settlement Agent : Page 49 Matching at The Settlement Agent Once 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. Instructions Matching: Example : Page 50 Instructions Matching: Example 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 : Page 51 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Section Seven : Section Seven Trade Settlement Settlement Terminology : Page 53 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. Settlement Considerations : Page 54 Settlement Considerations How 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) Types of Settlement : Page 55 Types of Settlement Full Settlement Partial Settlement Securities Only Cash Only Cross Currency Settlement Net Settlement Summary : Page 56 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 So far Covered : Page 57 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Section Eight : Section Eight Position/Inventory Management Inventory Management : Page 59 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). Methods of Inventory Management : Page 60 Methods of Inventory Management If 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. Inventory & Funding Management : Page 61 Inventory & Funding Management Automated Lending & Borrowing : Page 62 Automated Lending & Borrowing Service provided by large Custodians and Central Security 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. How do Trades & Positions get updated? : Page 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. So far Covered : Page 64 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Section Nine : Section Nine Fails & Fail Management Failing Trades and their Impact : Page 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) Why Trades Fail : Page 67 Why Trades Fail Instructions not received by custodian Instructions remain unmatched on value date Insufficient cash, collateral, credit line Insufficient securities The Importance of Managing Fails : Page 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. Interest Claims : Page 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. So far Covered : Page 70 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Section Ten : Section Ten Reconciliations What are Reconciliations : Page 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 basis Why do we monitor reconciliations? : Page 73 Why do we monitor reconciliations? Regulatory Managing Risk Corporate Actions Types of Reconciliations Position Reconciliations Trade Reconciliations System Reconciliations So far Covered : Page 74 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Reconciliations Section Eleven : Section Eleven Clearing and Custody Types of Custodian 1 : Page 76 Types of Custodian 1 Types of Custodian 2 : Page 77 Types of Custodian 2 So far Covered : Page 78 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Reconciliations Clearing & Custody What is a Corporate Action? : Page 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 Rights Section Twelve : Section Twelve Trade & Position Accounting Controlling : Page 81 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) 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. Controlling Responsibilities : Page 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 activity Example Control Reports : Page 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) So far Covered : Page 84 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Reconciliations Clearing & Custody Trade & Position Accounting Section Thirteen : Section Thirteen Regulatory & Compliance Responsibilities Regulators : Page 86 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 Regulator Responsibilities : Page 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. Financial Regulatory Authorities : Page 88 Financial Regulatory Authorities Reporting Methods : Page 89 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 Compliance : Page 90 Compliance Compliance 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 Trading So far Covered : Page 91 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Reconciliations Clearing & Custody Trade & Position Accounting Regulatory & Compliance Section Fourteen : Section Fourteen Conclusions Conclusions : Page 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 efficiency Section Fifteen : Section Fifteen References Recommended Reading : Page 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 & Banking Industry Websites : Page 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 Exchange Industry Websites : Page 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 Authorities Industry Websites : Page 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 Systems You do not have the permission to view this presentation. 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23512555-Trade-Life-cycle vm500 Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 2616 Category: Entertainment License: All Rights Reserved Like it (5) Dislike it (0) Added: March 20, 2011 This Presentation is Public Favorites: 3 Presentation Description No description available. Comments Posting comment... By: sandy_5star (3 month(s) ago) Hi, Could you please send me one copy of this PPT @ sandy_5star@yahoo.co.in Thanks and Regards, Sandeep Saving..... Post Reply Close Saving..... Edit Comment Close By: jomj (5 month(s) ago) Its really a nice presentation. Can you send me a copy of it to jomandu2000@gmail.com Saving..... Post Reply Close Saving..... 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See all Premium member Presentation Transcript Life Cycle of a Trade : Life Cycle of a Trade Training Academy Introduction : Page 2 Introduction Facilitator Self Course Outline Break Timings 15 mins – Forenoon 45 mins – Lunch 15 mins – Afternoon Expectations Expectations : Page 3 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 Slide 4: Page 4 What is your Idea of Life Cycle of a trade ?? Section One : Section One The Market Participants The Market Participants - Facilitators : Page 6 The Market Participants - Facilitators Brokers Dealers Investment Banks Stock Exchanges Agents Securities Trading Organisations Custodians Clearing Banks Regulators The Market Participants - Investors : Page 7 The Market Participants - Investors Institutional Investors Mutual Funds (Unit Trusts) Pension Funds Insurance Companies Hedge Funds Charities Individual Investors The Marketplace : Page 8 The Marketplace Markets & Stock Exchanges : Page 9 Markets & Stock Exchanges A Market is an environment in which securities are bought and sold. Central to some market places is the Stock 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 Euroclear Stock Exchanges : Page 10 Stock Exchanges Other Market Participants : Page 11 Other Market Participants Salespeople Data Providers Registrars Coupon Paying Agents Trade Matching Services Settlement Instruction Communication Mechanisms Market Participants - Issuers : Page 12 Market Participants - Issuers Organisations occasionally need to raise cash/capital to expand their businesses by: Selling part ownership issuing shares or equity Borrowing cash from investors issuing debt in the form of bonds Where does Deutsche Bank fit? : Page 13 Where does Deutsche Bank fit? Deutsche covers multiple functions: Broker Dealer Fund/Asset Manager Investment Bank Issuer Global Custodian Retail Bank So far Covered : Page 14 So far Covered Market Participants Section Two : Section Two Static Data What is Static Data? : Page 16 What is Static Data? Static Data is the common term to describe the store of information used to determine the appropriate actions required for successful processing of each trade. For Example: Trading Entities Trading Books within each entity Counterparties Instruments Currencies Prices Sources of Static Data : Page 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. Security Data Providers or Data Vendors : Page 18 Security Data Providers or Data Vendors Reuters Bloomberg Telekurs Rolfe & Nolan SWIFT DTCC Alert Direct/OMGEO Standard and Poors Euroclear Wallstreet SIAC NSCC Counterparty Static Data : Page 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, Email Instrument Static Data : Page 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 Factors Maintaining Static Data : Page 21 Maintaining Static Data Incorrect 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 STP Incorrect static data leads to reduced service and dissatisfied customers. Static Data Summary : Page 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. So far Covered : Page 23 So far Covered Market Participants Static Data Section Three : Section Three Trade Execution & Trades Processing Straight Through Processing : Page 25 Straight Through Processing What is a Trade? : Page 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. The Front Office : Page 27 The Front Office Trading Sales Broking Corporate Finance Repo Desk Why Trade? : Page 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. Trade Execution : Page 29 Trade Execution Trade execution tends to operate in one of three ways where 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. Telephone Trade Execution : Page 30 Trade Execution Furthermore 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 Archipelago Trade Capture : Page 31 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. Front Office Trade Detail : Page 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 Counterparty Trade Validation : Page 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. Trade Enrichment : Page 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. So far Covered : Page 35 So far Covered Market Participants Static Data Trade Execution & Trades Processing Section Four : Section Four Trade Confirmation Trade Confirmation/Agreement : Page 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. Trade Matching : Page 38 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 Corporation’s Trade Matching Service. (NSCC) Trade Affirmation : Page 39 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: Omgeo’s Oasys Global system. FIX – (Global) Oasys Domestic - (US) DTC ID (Institutional Delivery) – (US) Summary : Page 40 Summary Basic 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. So far Covered : Page 41 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Section Five : Section Five Trade Instruction Settlement Instructions : Page 43 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). Instruction Content : Page 44 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. Instruction Communication Methods : Page 45 Instruction Communication Methods S.W.I.F.T. CREST DTC Euroclear Clearstream Agent Banks Custodians Proprietary Messaging CREST DTC Euclid (for Euroclear) Cedcom (for Clearstream) So far Covered : Page 46 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Section Six : Section Six Instruction/Agent Matching Why do we match instructions? : Page 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 depositories Matching at The Settlement Agent : Page 49 Matching at The Settlement Agent Once 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. Instructions Matching: Example : Page 50 Instructions Matching: Example 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 : Page 51 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Section Seven : Section Seven Trade Settlement Settlement Terminology : Page 53 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. Settlement Considerations : Page 54 Settlement Considerations How 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) Types of Settlement : Page 55 Types of Settlement Full Settlement Partial Settlement Securities Only Cash Only Cross Currency Settlement Net Settlement Summary : Page 56 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 So far Covered : Page 57 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Section Eight : Section Eight Position/Inventory Management Inventory Management : Page 59 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). Methods of Inventory Management : Page 60 Methods of Inventory Management If 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. Inventory & Funding Management : Page 61 Inventory & Funding Management Automated Lending & Borrowing : Page 62 Automated Lending & Borrowing Service provided by large Custodians and Central Security 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. How do Trades & Positions get updated? : Page 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. So far Covered : Page 64 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Section Nine : Section Nine Fails & Fail Management Failing Trades and their Impact : Page 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) Why Trades Fail : Page 67 Why Trades Fail Instructions not received by custodian Instructions remain unmatched on value date Insufficient cash, collateral, credit line Insufficient securities The Importance of Managing Fails : Page 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. Interest Claims : Page 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. So far Covered : Page 70 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Section Ten : Section Ten Reconciliations What are Reconciliations : Page 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 basis Why do we monitor reconciliations? : Page 73 Why do we monitor reconciliations? Regulatory Managing Risk Corporate Actions Types of Reconciliations Position Reconciliations Trade Reconciliations System Reconciliations So far Covered : Page 74 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Reconciliations Section Eleven : Section Eleven Clearing and Custody Types of Custodian 1 : Page 76 Types of Custodian 1 Types of Custodian 2 : Page 77 Types of Custodian 2 So far Covered : Page 78 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Reconciliations Clearing & Custody What is a Corporate Action? : Page 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 Rights Section Twelve : Section Twelve Trade & Position Accounting Controlling : Page 81 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) 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. Controlling Responsibilities : Page 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 activity Example Control Reports : Page 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) So far Covered : Page 84 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Reconciliations Clearing & Custody Trade & Position Accounting Section Thirteen : Section Thirteen Regulatory & Compliance Responsibilities Regulators : Page 86 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 Regulator Responsibilities : Page 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. Financial Regulatory Authorities : Page 88 Financial Regulatory Authorities Reporting Methods : Page 89 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 Compliance : Page 90 Compliance Compliance 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 Trading So far Covered : Page 91 So far Covered Market Participants Static Data Trade Execution & Processing Trade Confirmation Trade Instruction Instruction / Agent Matching Trade Settlement Position / Inventory Management Fails & Fail Management Reconciliations Clearing & Custody Trade & Position Accounting Regulatory & Compliance Section Fourteen : Section Fourteen Conclusions Conclusions : Page 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 efficiency Section Fifteen : Section Fifteen References Recommended Reading : Page 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 & Banking Industry Websites : Page 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 Exchange Industry Websites : Page 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 Authorities Industry Websites : Page 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 Systems