Training
Introduction
Facilitator
Self
Course Outline
Break Timings
15 mins Forenoon
45 mins Lunch
15 mins Afternoon
Expectations
Page 2
Expectations
Static data
How trade is booked
Settlement and before settlement
Trade booking and settlement
Impact of incorrect settlement
Pre-matching before a settlement
Entire life of a trade
Front office & middle office
How trade is entered and how it is booked
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Page 4
Section One
The Market Participants
Page 7
The Marketplace
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Page 9
Stock Exchanges
Region
Country
Financial
Centre
Stock Exchange
Europe
UK
London
Germany
Frankfurt
Deutsche Bourse
Spain
Madrid
Bolsa de Madrid
China
Hong Kong
China
Shenzhen
Shanghai
Japan
Tokyo
Singapore
Singapore
Australia
Sydney
USA
New York
Chicago
Asia
Pacific
America
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Example
Corporations
Vodafone (UK)
Sovereign Entities
Kingdom of Denmark
Local Governments
City of London
Government Agencies
Supranational Organisations
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Page 13
So far Covered
I.
Market Participants
Page 14
Section Two
Static Data
Page 17
Page 18
Page 19
Issue
Coupon Dates
Alternative/External References,
Exchange
Currency
Maturity Date
Factors
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Page 21
Page 22
So far Covered
I.
Market Participants
II.
Static Data
Page 23
Section Three
Trade Execution & Trades Processing
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What is a Trade?
A legal contract between two counterparties. A seller and
a buyer.
The SELLER must deliver the commodity he has sold to
the buyer.
The BUYER must pay the agreed purchase price on the
agreed value date.
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Page 27
Why Trade?
Speculate
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Trade Execution
Trade execution tends to operate in one of three ways
where sellers and buyers execute trades:
Trading Floor
Computerised Exchanges
This term
applied to the liberalization of the London Stock Exchange (LSE)
when Trading was automated.
Telephone
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Trade Execution
Furthermore Trades can be:
Quote Driven
level at which they are prepared to buy and sell with the intention of
attracting business.
NASDAQ (US) SEAQ (UK)
Order Driven
Trade Capture
Regardless of the trade execution/origin, all trades must be
recorded formally by the market participant.
To update a trading position for a specific security within a trading
book
To update average price of the current trading position to enable the
trader to calculate trading profit or loss
To allow trade detail to be sent through to the Back Office for trade
processing and settlement
As part of Market & Regulatory Reporting requirements
To facilitate risk management
Traders use complex trading systems to facilitate trading & position
management, trade processing is usually done via Back Office
processing systems.
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Trade Validation
Trade validation occurs to check if the trade information received in
the Back office systems corresponds with the Front Office record.
Trade validation includes the checking of constituent static data
information:
Examples include:
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Trade Enrichment
Trade enrichment exists to add specific trade data to the
basic trade detail to allow downstream processing.
This data is not usually held in Front Office Trading
systems.
This data can be added manually however in the STP
environment the aim is to derive this automatically.
Examples include:
So far Covered
I.
Market Participants
II.
Static Data
Page 35
Section Four
Trade Confirmation
Trade Confirmation/Agreement
Trade Confirmation/Affirmation is an important process
required to reduce the risk of the traders P&L.
Until the counterparty acknowledges the trade detail the
effect on the price or quantity of the trade is subject to
change, impacting the traders book.
Trade agreement can be achieved through:
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Trade Matching
Trade Matching generally applies to mandatory
electronic matching of trade details.
Both parties are required to input details to a central
matching facility.
Matching results (i.e. matched, unmatched) are provided
by the trade matching facility to both parties.
Examples include:
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Trade Affirmation
Trade Affirmation relates to the electronic matching of trade details
typically between securities institutions and Institutional clients.
Trade details are input by the securities house and sent to a trade
affirmation facility.
The Trade affirmation central hub sends on the message.
The institutional client agrees (affirms) or disagrees and the response
is sent back to the securities house.
Both parties must subscribe to the service.
Examples include:
Summary
Basic Principles
The longer a trades detail remains unchecked after trade
date, the greater the risk of price movement and P&L
impact.
Trade confirmation/matching messages should be issued
as soon as possible after trade validation.
Timely and accurate confirmation generation is a major
client service consideration.
Prompt actioning of all confirmation discrepancies reduces
trade risk.
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So far Covered
I.
Market Participants
II.
Static Data
Page 41
Section Five
Trade Instruction
Settlement Instructions
Settlement Instructions are used to communicate the
movement of securities and cash to the custodian.
Trade Agreement confirms the commercial details of the
trade.
Settlement Instructions indicate the commercial details of
the trade AND the location and account details for the
cash and security movements. (Settlement Details).
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Instruction Content
Settlement Instructions tell the custodian/Agent to carry
out precise commands such as:
The quantity of securities to be received or delivered.
The net settlement value to be paid or received.
From whom securities will be received.
To whom payment must be made.
From whom payment will be received.
To whom securities must be delivered.
On which date to carry out these instructions.
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Proprietary Messaging
CREST
CREST
DTC
DTC
Euroclear
Clearstream
Agent Banks
Custodians
Page 45
So far Covered
I.
Market Participants
II.
Static Data
Trade Instruction
Page 46
Section Six
Instruction/Agent Matching
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Status Update
Unmatched Resolution
Trade Settlement
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1
2
3
4
Page 50
So far Covered
I.
Market Participants
II.
Static Data
Trade Instruction
Page 51
Section Seven
Trade Settlement
Settlement Terminology
Trade settlement is the act of exchanging securities and
cash between buyer and seller.
Value Date / Contractual Settlement Date.
Actual Settlement
Value Date and Settlement Date will be the same in the
majority of trade settlement cases.
A percentage of trades fail to settle on value date and will
settle on another date referred to as the actual settlement
date.
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Settlement Considerations
How to ensure trade settlement
Ensure the seller holds the required level of securities at
the correct custodian.
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Types of Settlement
Full Settlement
Partial Settlement
Securities Only
Cash Only
Cross Currency Settlement
Net Settlement
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Summary
Timely settlement of trades is an important part of the
Trade Lifecycle with implications across the following
areas:
Inventory Management
Cash Management
Settlement Risk
Cost Management
Firm Reputation
Page 56
So far Covered
I.
Market Participants
II.
Static Data
Trade Instruction
Page 57
Section Eight
Position/Inventory Management
Inventory Management
Management of the stock holding is an integral part of
trade settlement:
Inventory Management ensures:
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Realignment.
Autoborrow.
Page 61
Manual Updates
Page 63
So far Covered
I.
Market Participants
II.
Static Data
Trade Instruction
Page 64
Section Nine
Fails & Fail Management
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Page 67
Page 68
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
Page 69
So far Covered
I.
Market Participants
II.
Static Data
Trade Instruction
Section Ten
Reconciliations
Page 72
Types of Reconciliations
Position Reconciliations
Trade Reconciliations
System Reconciliations
Page 73
So far Covered
I.
Market Participants
II.
Static Data
Trade Instruction
Reconciliations
Page 74
Section Eleven
Clearing and Custody
Types of Custodian 1
Term
Description
Example
Custodian
Deutsche Bank
Domestic Custody
Services
Global Custodian
State Street
Citibank Milan
Local Custodian
Sub-Custodian
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Citigroup
BoNY
Paribas
Banco Espirito Santo
Lisboa
Citibank Madrid
Types of Custodian 2
Term
Description
Examples
Central Securities
Depository (CSD).
DTC (USA)
CREST (UK & Eire)
JASDEC (JPY)
CCASS (HK)
A CSD that handles domestic
securities of the country in which it is
located.
National Central
Securities
Depository (NCSD)
International
Central Securities
Depository (ICSD)
Euroclear
(Brussels)
Clearstream
(Luxembourg)
Settlement Agent
Citibank Milan
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Citibank Madrid
So far Covered
I.
Market Participants
II.
Static Data
III.
IV.
Trade Confirmation
V.
Trade Instruction
VI.
X.
Reconciliations
XI.
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Coupon Payments
Cash Dividends
Stock Dividends
Stock Split
Bonus Shares
Annual Meeting
Voting Rights
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Section Twelve
Trade & Position Accounting
Controlling
The accounting group within the bank is responsible for
correctly recording and monitoring all of the financial
transactions occurring within the Securities Trading
House:
Deutsche Bank Controllers include:
Legal Entity Controller (LEC)
Controlling Responsibilities
Monitor Stock/Security Positions
Monitor Cash Balances
Track Firm Books and Records
Create Good Processes
Create Controls
Reconcile Trade Data
Reconcile Cash Flow
Reconcile all Journal activity
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Page 83
So far Covered
I.
Market Participants
II.
Static Data
III.
XI.
IV.
Trade Confirmation
V.
Trade Instruction
VI.
X.
Reconciliations
Page 84
Section Thirteen
Regulatory & Compliance
Responsibilities
Regulators
Regulatory authorities exist within the securities
industry to ensure:
All business undertaken within the marketplace is done in
the proper manner
To protect investors who are participants within the
marketplace
Guard the reputation and integrity of the marketplace
Monitor activity which fails outside of normal business
trading practice
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Regulator Responsibilities
Assessing suitability of securities trading houses to
participate within the market place.
Monitor the business undertaken by securities trading
houses, investment advisors & fund managers.
Enforcement of laws and possible prosecution of security
law violators.
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Regulatory Authority
Australia
Bahamas
France
Hong Kong
Japan
Singapore
UK
USA
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Reporting Methods
A number of methods exist dependent on how the local
Regulator requires reporting to be effected
Automatic forwarding of trade details by a computerised
exchange requiring no additional reporting
Automated message transmission by the member for
confirmation/matching/instruction purposes part of which is
used to satisfy transaction reporting requirements
File feeds produced from Front Office/Back
Office/Controlling systems and sent direct to Regulator
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Compliance
Compliance is the Banks internal regulator.
Responsibilities include:
Ensuring compliance to rules of appropriate financial
regulatory body
Handling confidential information
Ensure that personnel are adequately and properly
licensed to operate in the marketplace
Managing anti-money laundering regulations
Monitoring Employee Personal Trading
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So far Covered
I.
Market Participants
II.
Static Data
III.
XI.
IV.
Trade Confirmation
V.
Trade Instruction
VI.
X.
Reconciliations
Page 91
Section Fourteen
Conclusions
Conclusions
Reduce Settlement Cycles
Increase Straight Through Processing for trades
Increase use of central Counterparties
Increase use of Golden Source static data
Active management of collateral
Minimise Risk
Minimise Operational Cost
Offer increased service to clients
Manage increasing volumes
Maximise internal efficiency
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Section Fifteen
References
Recommended Reading
Michael Simmons
Stephen Valdez
David Dasey
Moorad Choudhry
Robert Hudsen
Treasury Management
Financial Engineering
Oxford paperbacks
Page 95
Industry Websites
http://www.crestco.co.uk/
http://www.dtcc.com/
CREST
Depository Trust & Clearing Corporation
http://www.euroclear.com/
Euroclear
http://www.jasdaq.co.jp/index_en.jsp Japanese Securities Depository Centre
http://www.isma.org/home.html
International Securities Market Associations
http://www.bankofengland.co.uk/Links/setframe.html
Bank of England
http://www.fsa.gov.uk/
Financial Services Authority
http://www.sec.gov/
http://www.nasdaq.com/
http://www.amex.com/
American Stock Exchange
http://www.londonstockexchange.com/London Stock Exchange
http://www.lchclearnet.com/
http://www.liffe.com/
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Industry Websites
http://www.iosco.org/iosco.html
http://www.ipma.org.uk/
http://www.isda.org/index.html
http://www.isla.co.uk/
http://www.isma.com/home.html
http://www.liba.org.uk/
http://www.lsta.org/
http://www.sia.com/
Federation of Exchanges
http://www.trioptima.com/tri/
http://www.finanz-adressen.de/WE-fin-regulatory.html
Financial Regulatory Authorities
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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/
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
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