Life Cycle of a Trade

Training

Introduction
 Facilitator  Self  Course Outline  Break Timings

 15 mins – Forenoon  45 mins – Lunch  15 mins – Afternoon
 Ex ectations

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Expectations
Static data How trade is booked Settlement and before settlement Trade booking and settlement Impact of incorrect settlement Pre-matc ing before a settlement Entire life of a trade !ront office " middle office How trade is entered and ow it is booked
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# at is your Idea of Life Cycle of a trade $$ Page 4 .

Section %ne T e &arket Participants .

T e &arket Participants .!acilitators  Brokers  !ealers  "n#estment Banks  Stock Exchanges  Agents  Securities Tra$ing Organisations  Custo$ians  Clearing Banks  %egulators Page 6 .

In'estors  "nstitutional "n#estors  &utual Fun$s '(nit Trusts)  *ension Fun$s  "nsurance Com anies  +e$ge Fun$s  Charities  "n$i#i$ual "n#estors Page 7 .T e &arket Participants .

T e &arketplace ".-ESTO%S ISS(E)S Page 8 .-ESTO%S ISS(E)S A.TS Securities ".E. TS Securities Trading House Exc anges A. -ESTO %S A.TS Securities ".E.E.

o#ernment Bon$s tra$e$ on the *aris Bourse settle in Euroclear Page 9 .&arkets " Stock Exc anges * &arket is an en'ironment in w ic securities are boug t and sold+ Central to some market places is t e Stock Exc ange+  Tra$es execute$ o#er an Exchange are execute$ /On0 Exchange1 or /Exchange Tra$e$1  Other tra$es execute$ o#er the tele hone are /OTC1 'O#er the Counter) or .on0Exchange Tra$e$  Each securities market has an associate$ an$ recognisa2le lace to effect settlement  E3g3 French .

.e: .SE) Chicago Stock Exchange Euro e (5 .ork Chicago Page 10 .ork Stock Exchange '.erman4 S ain Asia *acificChina China 8a an Singa ore Australia America (SA Frankfurt &a$ri$ +ong 5ong Shen7hen Shanghai Tok4o Singa ore S4$ne4 .Stock Exc anges %egion Countr4 Financial Centre Lon$on Stock Exchange Lon$on Stock Exchange 'LSE) Lon$on &etal Exchange Lon$on "nternational Financial Futures 6 O tions Exchange 'L"FFE) !eutsche Bourse Bolsa $e &a$ri$ Stock Exchange of +ong 5ong +ong 5ong Futures Exchange Shen7hen Stock Exchange Shanghai Stock Exchange Tok4o Stock Exchange Tok4o "nternational Financial Futures Exchange 'T"FFE) Stock Exchange of Singa ore Singa ore "nternational &onetar4 Exchange 'S"&E9) Australian Stock Exchange 'AS9) .e: .

%t er &arket Participants  Sales eo le  !ata *ro#i$ers  %egistrars  Cou on *a4ing Agents  Tra$e &atching Ser#ices  Settlement "nstruction Communication &echanisms Page 11 .

&arket Participants .o#ernment Agencies Su ranational Organisations -o$afone '(5) 5ing$om of !enmark Cit4 of Lon$on Fe$eral .capital to expand t eir businesses by Selling art o:nershi issuing shares or e<uit4  Borro:ing cash from in#estors issuing $e2t in the form of 2on$s T4 e of "ssuer Cor orations So#ereign Entities Local .o#ernments .Issuers %rganisations occasionally need to raise cas .ational &ortgage Association "nternational Bank for %econstruction 6 !e#elo ment '=orl$ Bank – "B%!) Exam le Page 12 .

# ere does .lo2al Custo$ian  %etail Bank Page 13 .eutsc e co'ers multiple functions Broker  !ealer  Fun$>Asset &anager  "n#estment Bank  "ssuer  .eutsc e /ank fit$ .

So far Co'ered I+ &arket Participants Page 14 .

Section Two Static .ata .

ata$ Static .ata is t e common term to describe t e store of information used to determine t e appropriate actions re0uired for successful processing of eac trade+ !or Example Tra$ing Entities  Tra$ing Books :ithin each entit4  Counter arties  "nstruments  Currencies  *rices Page 16 .# at is Static .

ata  =here ossi2le? financial institutions tr4 an$ create a core of /.Sources of Static .ol$en Source1 static $ata to a#oi$ $ata conflicts in inter0$e en$ent s4stems  Com anies s ecialise in gathering an$ $istri2uting financial $ata to institutions #ia@  Electronic File Fee$s  "nternet  Through on site terminals3 Page 17 .

Security .olan  S="FT  !TCC  Alert !irect>O&.EO  Stan$ar$ an$ *oors  Euroclear  =allstreet  S"AC  .ata Pro'iders or .ata 1endors  %euters  Bloom2erg  Telekurs  %olfe 6 .SCC Page 18 .

ame? A$$ress 6 Contact !etails  Authori7e$ Cre$it Limits  %elate$ Com anies  Stan$ar$ Settlement "nstructions  !ate of account set u  T4 e of "nstitution  !ocumentation signe$  Tax Status  %egistere$ %e resentati#e  Confirmation !etails  Fax? Telex? Electronic Tra$e Confirmation? S="FT? Email Page 19 .Counterparty Static .ata  .

ame? Long .ata  T4 e of instrument  "ssue  E<uit4? Bon$? =arrant? !eri#ati#e? Commo$it4  Short .Instrument Static .ame? Si7e? !enomination? "ssuer  Cou on %ate? *a4ment Characteristics 0 AB>ACB? A>ACB etc etc  Cou on !ates  Alternati#e>External %eferences?  Exchange  Currenc4  &aturit4 !ate  Factors  "S".? Common Co$e? %"C? Duick Co$e? Cusi Page 20 .

&aintaining Static .ata Incorrect static data causes many processing errors !ela4e$ Confirmations  (nmatche$ Transactions  Settlement Failure  "ncorrect Fee calculations  "ncorrect *rofit 6 Loss Calculation  *oor %e orting '%egulator4 6 risk im act)  "ncrease$ cost er transaction $ue to re$uce$ ST* Incorrect static data leads to reduced ser'ice and dissatisfied customers+ Page 21 .

Static .*T*  &ust 2e o ulate$ correctl4 :ithin all of the rele#ant s4stems3  &ust 2e o2taine$ from a cre$i2le source as timel4 as ossi2le3 Page 22 .ata Summary  Ba$ Static !ata results in re$uce$ ser#ice le#els to clients $ue to rocessing hol$0u s an$ ossi2le tra$e failure  Ba$ Static !ata im acts o erational risk an$ increases the cost er tra$e rocesse$  Ba$ Static !ata contri2utes to oor internal 6 external re orting im acting risk 6 re utation  Static !ata :ill continue to 2e an im ortant $e en$enc4 on the efficient rocessing of tra$es es eciall4 as the tra$e lifec4cle :in$o: 2ecomes smaller  ST*TIC .

ata Page 23 .So far Co'ered I+ II+ &arket Participants Static .

Section T ree Trade Execution " Trades Processing .

Straig t T roug Processing Tra$e Execution Tra$e Ca ture Tra$e -ali$ation *osition>"n#entor4 management Securities Len$ing 6 Borro:ing Tra$e Enrichment Tra$e *rocessing Tra$e Confirmation>Affirmation>&atching Tra$e "nstruction "nstruction>Agent &atching Tra$e Settlement Fails 6 Fail &anagement Page 25 Straig t T roug Processing 2STP3 Tra$e>*osition Accounting Cor orate Actions %econciliations Cash Fun$ing .

# at is a Trade$  A legal contract 2et:een t:o Ecounter artiesF3 A seller an$ a 2u4er3  The SELLER must $eli#er the commo$it4 he has sol$ to the 2u4er3  The BUYER must a4 the agree$ urchase rice on the agree$ #alue $ate3 Page 26 .

T e !ront %ffice  Tra$ing  Sales  Broking  Cor orate Finance  %e o !esk Page 27 .

# y Trade$  S eculate  *rofit from  Accumulate rice mo#e or increase in #alue of the asset3  Benefit from $i#i$en$ on shares an$ interest on 2on$s3  +e$ging@  To s eculate an$ accumulate3  To re$uce risk3 Page 28 .

Trade Execution Trade execution tends to operate in one of t ree ways w ere sellers and buyers execute trades Tra$ing Floor  Tra$itional metho$ of tra$ing – face to face on the tra$ing floor of a Stock Exchange3  Com uterise$ Exchanges  Esta2lishe$ in the (5 as  Tele hone art of the Big Bang in 1GHC3 This term a lie$ to the li2erali7ation of the Lon$on Stock Exchange 'LSE) :hen Tra$ing :as automate$3 Page 29 .

Trade Execution !urt ermore Trades can be Duote !ri#en  &arket &akers <uote rices #ia com uterise$ screens sho:ing the le#el at :hich the4 are re are$ to 2u4 an$ sell :ith the intention of attracting 2usiness3  .)  EC.Fs o erate on an electronic 2asis onl43 Archi elago  Euro0&TS Brokertec Page 30 .erman4) SETS '(5)  Electronic Communications .AS!AD '(S) SEAD '(5)  Or$er !ri#en  Or$ers from sellers are matche$ :ith 2u4ersF or$ers electronicall43 SEATS 'Australia)  9etra '.et:orks 'EC.

Trade Capture )egardless of t e trade execution.origin4 all trades must be recorded formally by t e market participant+  To u $ate a tra$ing osition for a s ecific securit4 :ithin a tra$ing 2ook  To u $ate a#erage rice of the current tra$ing osition to ena2le the tra$er to calculate tra$ing rofit or loss  To allo: tra$e $etail to 2e sent through to the Back Office for tra$e rocessing an$ settlement  As art of &arket 6 %egulator4 %e orting re<uirements  To facilitate risk management Traders use complex trading systems to facilitate trading " position management4 trade processing is usually done 'ia /ack %ffice processing systems+ Page 31 .

etail  Tra$ing Book  Tra$e !ate  !eal Time  -alue !ate  O eration 'e3g3 Bu4>Sell? Len$>Borro:? "n>Out)  Duantit4  "nstrument>Securit4  *rice  Counter art4 Page 32 .!ront %ffice Trade .

Trade 1alidation  Tra$e #ali$ation occurs to check if the tra$e information recei#e$ in the Back office s4stems corres on$s :ith the Front Office recor$3  Tra$e #ali$ation inclu$es the checking of constituent static $ata information@  Exam les inclu$e@  "s the securit4 recognise$ on the s4stemI  "s the Counter art4 account recognise$I  "s the Tra$er allo:e$ to tra$e on the tra$ing 2ookI  "s the tra$ing 2ook #ali$ to tra$e securit4 xI  "s the #alue $ate a #ali$ settlement $ate in the location of settlementI  Are the securities restricte$I *ll detected errors must be in'estigated and corrected+ Page 33 .

Trade Enric ment  Tra$e enrichment exists to a$$ s ecific tra$e $ata to the 2asic tra$e $etail to allo: $o:nstream rocessing3  This $ata is not usuall4 hel$ in Front Office Tra$ing s4stems3  This $ata can 2e a$$e$ manuall4 ho:e#er in the ST* en#ironment the aim is to $eri#e this automaticall43  Exam les inclu$e@  Calculation of cash #alues3  %egulator4 %e orting re<uire$3  Tra$e Confirmation re<uirements3  Selection of custo$ian $etails3  Selection of Settlement "nstructions an$ communication metho$3 Page 34 .

ata III+ Trade Execution " Trades Processing Page 35 .So far Co'ered I+ II+ &arket Participants Static .

Section !our Trade Confirmation .

Trade Confirmation.*greement  Tra$e Confirmation>Affirmation is an im ortant rocess re<uire$ to re$uce the risk of the traders P&L3  (ntil the counter art4 ackno:le$ges the tra$e $etail the effect on the rice or <uantit4 of the tra$e is su2Ject to change? im acting the tra$ers 2ook3  Tra$e agreement can 2e achie#e$ through@  Sen$ing tra$e confirmations to the counter art43  %ecei#ing tra$e confirmations from the counter art43  Tra$e or Contract &atching3  Tra$e Affirmation3 Page 37 .

ational Securities Clearing Cor orationFs Tra$e &atching Ser#ice3 '.Trade &atc ing Trade &atc ing generally applies to mandatory electronic matc ing of trade details+  Both arties are re<uire$ to in ut $etails to a central matching facilit43  &atching results 'i3e3 matche$? unmatche$) are ro#i$e$ 24 the tra$e matching facilit4 to 2oth arties3  Exam les inclu$e@  Omgeo Central Tra$e &anager 'CT&)3  T%A9 '"nternationall4 tra$e$ $e2t 6 securities)3  !e ositor4 Trust 6 Clearing Cor oration '!TCC)  .SCC) Page 38 .

lo2al)  Oas4s !omestic 0 '(S)  !TC "! '"nstitutional !eli#er4) – '(S) Page 39 .Trade *ffirmation Trade *ffirmation relates to t e electronic matc ing of trade details typically between securities institutions and Institutional clients+  Tra$e $etails are in ut 24 the securities house an$ sent to a tra$e affirmation facilit43  The Tra$e affirmation central hu2 sen$s on the message3  The institutional client agrees 'affirms) or $isagrees an$ the res onse is sent 2ack to the securities house3  Both arties must su2scri2e to the ser#ice3  Exam les inclu$e@  OmgeoFs Oas4s .lo2al s4stem3  F"9 – '.

Summary /asic Principles  The longer a tra$eFs $etail remains unchecke$ after tra$e $ate? the greater the risk of rice mo#ement an$ *6L im act3  Tra$e confirmation>matching messages shoul$ 2e issue$ as soon as ossi2le after tra$e #ali$ation3  Timel4 an$ accurate confirmation generation is a maJor client ser#ice consi$eration3  *rom t actioning of all confirmation $iscre ancies re$uces tra$e risk3 Page 40 .

So far Co'ered I+ II+ &arket Participants Static .ata III+ Trade Execution " Processing I1+ Trade Confirmation Page 41 .

Section !i'e Trade Instruction .

Settlement Instructions Settlement Instructions are used to communicate t e mo'ement of securities and cas to t e custodian+  Tra$e Agreement confirms the commercia detai s of the tra$e3  Settlement "nstructions in$icate the commercia detai s of the tra$e A.! the ocatio! an$ acco"!t detai s for the cash an$ securit4 mo#ements3 'Settlement !etails)3 Page 43 .

*gent to carry out precise commands suc as The <uantit4 of securities to 2e recei#e$ or $eli#ere$3  The net settlement #alue to 2e ai$ or recei#e$3  From :hom securities :ill 2e recei#e$3  To :hom a4ment must 2e ma$e3  From :hom a4ment :ill 2e recei#e$3  To :hom securities must 2e $eli#ere$3  On :hich $ate to carr4 out these instructions3 Page 44 .Instruction Content Settlement Instructions tell t e custodian.

Instruction Communication &et ods S+#+I+!+T+  C%EST  !TC  Euroclear  Clearstream  Agent Banks  Custo$ians Proprietary &essaging  C%EST  !TC  Eucli$ 'for Euroclear)  Ce$com 'for Clearstream) Page 45 .

So far Co'ered
I+ II+ &arket Participants Static .ata

III+ Trade Execution " Processing I1+ Trade Confirmation 1+ Trade Instruction

Page 46

Section Six
Instruction,*gent &atc ing

# y do we matc instructions$
To reduce settlement risk by "ncreasing the chances of tra$e settlement on #alue $ate  %esol#ing $ifferences 2et:een tra$es an$ counter arties  Ena2ling accurate fun$ing of cash in nostro accounts  &anaging stock in#entor4 in $e ositories

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&atc ing at T e Settlement *gent %nce Instructions a'e been recei'ed at t e Custodian4 t e next lifecycle steps include "nstruction &atching  Custo$ian attem instruction3 t to match the instruction to the counter art4  Status ( $ate  Attachment of the current status of the instruction3 'matche$>unmatche$>unkno:n)3  (nmatche$ %esolution  Tra$e Settlement  "n#estigation an$ resolution of non0matching instructions3 ( $ating the current status :ithin the securities tra$ing organisationFs 2ooks an$ recor$s3 Page 49 .

Instructions &atc ing.Example CS! or "CS! "nstruction Com arison 6 Securities Trading House Settlement "nstruction Securities House Status 6 Settlement "nstruction Counter art4 5 Counterparty 7 Status & atche$ or (nm atche$ 8 Status Status &atche$ or (nm atche$ 7 1 K A 4 Page 50 "nstructions sent in 24 Securities +ouse an$ Counter art43 "nstruction matching occurs3 Status is recor$e$3 "nstruction Status '&atche$>(nmatche$) is sent 2ack to 2oth arties3 .

ata III+ Trade Execution " Processing I1+ Trade Confirmation 1+ Trade Instruction 1I+ Instruction . *gent &atc ing Page 51 .So far Co'ered I+ II+ &arket Participants Static .

Section Se'en Trade Settlement .

Settlement Terminology Trade settlement is t e act of exc anging securities and cas between buyer and seller+  #a "e $ate > %o!tract"a Sett eme!t $ate3  &ct"a Sett eme!t  -alue !ate an$ Settlement !ate :ill 2e the same in the maJorit4 of tra$e settlement cases3  A ercentage of tra$es fail to settle on #alue $ate an$ :ill settle on another $ate referre$ to as the actual settlement $ate3 Page 53 .

Settlement Considerations How to ensure trade settlement  Ensure the seller hol$s the re<uire$ le#el of securities at the correct custo$ian3  Some securities can settle at more than one location3  Ensure the urchaser has sufficient cash to make the a4ment3  The urchaser ma4 aggregate 2alances o#er a num2er of accounts? the total amount must co#er the amount re<uire$3 'Fun$ing)3  The urchaser ma4 ha#e a cre$it agreement :ith the custo$ian :ho :ill co#er the cash shortfall3 'Secure$ cre$it line>O#er$raft)3  The urchaser ma4 ha#e a collateral agreement :here24 collateral is hel$ in the account to offset an4 non return of fun$s3 '&argin) Page 54 .

Types of Settlement  Full Settlement  *artial Settlement  Securities Onl4  Cash Onl4  Cross Currenc4 Settlement  .et Settlement Page 55 .

Summary Timely settlement of trades is an important part of t e Trade Lifecycle wit implications across t e following areas "n#entor4 &anagement  Cash &anagement  Settlement %isk  Cost &anagement  Firm %e utation Page 56 .

ata III+ Trade Execution " Processing I1+ Trade Confirmation 1+ Trade Instruction 1I+ Instruction .So far Co'ered I+ II+ &arket Participants Static . *gent &atc ing 1II+ Trade Settlement Page 57 .

Section Eig t Position.In'entory &anagement .

In'entory &anagement &anagement of t e stock olding is an integral part of trade settlement "n#entor4 &anagement ensures@  The correct amount of securities '!omi!a ( are a#aila2le  At the correct location 'de)ot(*  At the correct time 'o! +a "e date(* Page 59 .

&et ods of In'entory &anagement If securities are una'ailable we can consider t e following "nternal Book Transfer3  Borro: securities from another firm account same $e ot3 ot3  %ealignment3  Borro: securities from another firm account $ifferent $e  Borro: the securities from the market3  Borro: the securities from the custo$ian>central $e  Stock Borro: Loan Tra$e3  Auto2orro:3 ositor43  Execute a %e urchase Agreement '%e o)  !o nothing an$ let the tra$e fail3 Page 60 .

In'entory " !unding &anagement Transmit Settlement "nstruction &atch Settlement "nstruction at Custo$ian Settle at Custo$ian Securities Cas Choices Choices *uto/orrow Page 61 Lend .o 9ot ing /orrow (nsecured .o 9ot ing )epo /orrow 'ia )epo .

epositories Borro:ers  Borro: re<uire$ securities automaticall43  Borro: certain t4 es of securit4 automaticall4 i3e3 S  Borro: u on re<uest3  Sometimes use$ as a last resort $ue to the cost3  Len$ers anish Bon$s3  Len$ all securities automaticall43  Len$ certain t4 es of securit4 automaticall43  Len$ u on re<uest3 Page 62 .*utomated Lending " /orrowing Ser'ice pro'ided by large Custodians and Central Security .

How do Trades " Positions get updated$  Automate$ ( $ates  "nstruction statuses are sent in 24 the custo$ian 'full4 settle$? artiall4 settle$? faile$ etc)3  The Securities Tra$ing +ouse automaticall4 loa$s this information into the settlements s4stems3  The s4stem attem ts to locate the rele#ant tra$e in its internal 2ooks an$ recor$s3  Once foun$ it recor$s the status u $ate against the transaction3  "t :ill also automaticall4 u $ate the rele#ant securit4 ositions an$ 2alances reflecting the $eli#er4 or recei ts3  &anual ( $ates  "n some cases it ma4 2e necessar4 to settle tra$e manuall4 an$ a settlements s ecialist ma4 manuall4 recor$ the u $ate against the tra$e recor$3 Page 63 .

ata III+ Trade Execution " Processing I1+ Trade Confirmation 1+ Trade Instruction 1I+ Instruction . In'entory &anagement Page 64 .So far Co'ered I+ II+ &arket Participants Static . *gent &atc ing 1II+ Trade Settlement 1III+ Position .

Section 9ine !ails " !ail &anagement .

!ailing Trades and t eir Impact  A faile$ tra$e is an4 securities transaction that $oes not settle on #alue $ate3  The 2u4er an$ seller are im acte$ 24 settlement failure@  (na2le to use the cash to fun$ other securit4 urchases3  (na2le to len$ on mone4 markets an$ earn cre$it interest on cash3  (na2le to a4 off existing o#er$raft>$e2t3  (na2le to use securities re<uire$ for an on:ar$ $eli#er4 causing a 2reak in the chain3  %isk im act $ue to mo#ement in the market causing a change in the #alue of securities3 'mark to market) Page 66 .

# y Trades !ail  "nstructions not recei#e$ 24 custo$ian  "nstructions remain unmatche$ on #alue $ate  "nsufficient cash? collateral? cre$it line  "nsufficient securities Page 67 .

T e Importance of &anaging !ails  Fails .i ha#e cash im lications  "nterest claims on fails to recei#e3  "nterest ex ense on fails to $eli#er3  Fails make the reconciliation of cor orate actions $ifficult :hich can lea$ to material losses  %egulator4 "m act 0 "n some markets fines are im ose$ for late tra$e settlement  Australia – Fines are im ose$ $ail4 from #alue $ate to settlement $ate for tra$es execute$ on the Australian Stock Exchange3  (5 0 Fines are im ose$ 24 C%EST from a mem2erFs failure to achie#e re0$efine$ settlement targets3 Page 68 .

Interest Claims  An i!terest c aim is com ensation from the failing art4 to for the loss of cash interest or use of securities3  Faile$ tra$es are monitore$ to $etermine the reason for failure an$ ena2le the interest claim to 2e execute$ against the counter art43  Some market laces 'e3g3 "S&A) ha#e minimum claima2le interest recommen$ations an$ $ea$lines 24 :hich claims must 2e issue$3  Back Office Settlements a$$ immense #alue 24 acti#el4 monitoring instruction statuses an$ hel ing to accuratel4 fun$ cash shortfalls or short ositions3  "n some Securities Tra$ing +ouses? if the Firm Tra$er is at fault then the cost of the fail can 2e $irectl4 attri2ute$ to their 2ook? im acting their *6L3 Page 69 .

So far Co'ered I+ II+ &arket Participants Static . In'entory &anagement I:+ !ails " !ail &anagement Page 70 . *gent &atc ing 1II+ Trade Settlement 1III+ Position .ata III+ Trade Execution " Processing I1+ Trade Confirmation 1+ Trade Instruction 1I+ Instruction .

Section Ten )econciliations .

# at are )econciliations  %econciliations exist to check the accurac4 of the firms 2ooks an$ recor$s@  "nternall4 2et:een s4stems an$ $e artments  Externall4 :here securities an$ cash are hel$3  A %econciliation Break is a $iscre anc4 2et:een one recor$ an$ another  All 2reaks shoul$ 2e in#estigate$? accounte$ for an$ correcte$ to ensure continue$ integrit4  Automation of reconciliation re orting facilitates timel4 in#estigation an$ resolution of 2reaks on a $ail4 2asis Page 72 .

# y do we monitor reconciliations$  %egulator4  &anaging %isk  Cor orate Actions T4 es of %econciliations  *osition %econciliations  Tra$e %econciliations  S4stem %econciliations Page 73 .

*gent &atc ing 1II+ Trade Settlement 1III+ Position . In'entory &anagement I:+ !ails " !ail &anagement :+ )econciliations Page 74 .ata III+ Trade Execution " Processing I1+ Trade Confirmation 1+ Trade Instruction 1I+ Instruction .So far Co'ered I+ II+ &arket Participants Static .

Section Ele'en Clearing and Custody .

*ari2as .lo2al Custo$ianFs net:ork of custo$ians3 Citi2ank &ilan Citi2ank &a$ri$ Su20Custo$ian Page 76 .Types of Custodian 6 Term Custo$ian !escri tion Exam le An organisation that hol$s securities an$ !eutsche Bank !omestic cash on its clientsF 2ehalf an$ ma4 effect Custo$4 Ser#ices tra$e settlement on its clientsF 2ehalf3 As er custo$ian? 2ut has a net:ork of local 'or su20custo$ians) that hol$ securities an$ cash an$ effect tra$e settlement on 2ehalf of the glo2al custo$ian3 State Street Citigrou Bo.lo2al Custo$ian Local Custo$ian A custo$ian that o erates :ithin a s ecific Cre$it L4onnais *aris financial centre3 Banco Es irito Santo Lis2oa A custo$ian :ithin a ..

CS!) "nternational Central A CS! that han$les $omestic an$ Euroclear 'Brussels) Securities !e ositor4 international securities3 Clearstream '"CS!) Onl4 t:o organisations are recognise$ as 'Luxem2ourg) "C!SFs3 Settlement Agent Page 77 An organisation that effects the exchange Citi2ank &ilan of securities an$ cash on 2ehalf of its Citi2ank &a$ri$ clientsL resultant securities an$ cash .ational Central Securities !e ositor4 '.) transfer3 A CS! that han$les $omestic securities of CCASS '+5) the countr4 in :hich it is locate$3 .Types of Custodian 5 Term Central Securities !e ositor4 'CS!)3 !escri tion Exam les An organisation that hol$ securities? !TC '(SA) normall4 in 2ook entr4 formL usuall4 the C%EST '(5 6 Eire) lace of settlement? effecte$ through 2ook 8AS!EC '8*.

ata Trade Execution " Processing Trade Confirmation Trade Instruction Instruction .So far Co'ered I+ II+ III+ I1+ 1+ 1I+ &arket Participants Static . *gent &atc ing 1II+ Trade Settlement 1III+ Position . In'entory &anagement I:+ :+ :I+ !ails " !ail &anagement )econciliations Clearing " Custody Page 78 .

# at is a Corporate *ction$ *ny action by an Issuer w ic may affect t e in'estor The $istri2ution of 2enefits to existing sharehol$ers or 2on$hol$ers  Cou on *a4ments  Cash !i#i$en$s  Stock !i#i$en$s  Stock S lit  Bonus Shares  A change in the structure of an existing securit4  A notification that ma4 or ma4 not re<uire a res onse from the securities o:ner  Annual &eeting  -oting %ights Page 79 .

Section Twel'e Trade " Position *ccounting .

Controlling T e accounting group wit in t e bank is responsible for correctly recording and monitoring all of t e financial transactions occurring wit in t e Securities Trading House.eutsc e /ank Controllers include Legal Entit4 Controller 'LEC)  %es  %es  %es Page 81 onsi2le for !B Com anies3 onsi2le for ro$uct lines an$ the Business3 onsi2le for &anaging %isk across the all $i#isions centrall43  Business Area Controller 'BAC)  Central Functions – %isk Controlling .

oo$ *rocesses  Create Controls  %econcile Tra$e !ata  %econcile Cash Flo:  %econcile all 8ournal acti#it4 Page 82 .Controlling )esponsibilities  &onitor Stock>Securit4 *ositions  &onitor Cash Balances  Track Firm Books an$ %ecor$s  Create .

Example Control )eports  %econciliations  *rofit an$ Loss Statement '*6L)  Balance Sheet %e orting 'BS)  Bu4 an$ +ol$ %e orting 'B6+)  &anagement "nformation %e orting '&"S)  Cre$it %isk %e orting 'C%ES) Page 83 .

So far Co'ered I+ II+ III+ I1+ 1+ 1I+ &arket Participants Static .ata Trade Execution " Processing Trade Confirmation Trade Instruction Instruction . In'entory &anagement I:+ :+ !ails " !ail &anagement )econciliations Page 84 . *gent &atc ing :I+ Clearing " Custody :II+ Trade " Position *ccounting 1II+ Trade Settlement 1III+ Position .

Section T irteen )egulatory " Compliance )esponsibilities .

uar$ the re utation an$ integrit4 of the market lace  &onitor acti#it4 :hich fails outsi$e of normal 2usiness tra$ing ractice Page 86 .)egulators )egulatory aut orities exist wit in t e securities industry to ensure All 2usiness un$ertaken :ithin the market lace is $one in the ro er manner  To rotect in#estors :ho are artici ants :ithin the market lace  .

)egulator )esponsibilities  Assessing suita2ilit4 of securities tra$ing houses to artici ate :ithin the market lace3  &onitor the 2usiness un$ertaken 24 securities tra$ing houses? in#estment a$#isors 6 fun$ managers3  Enforcement of la:s an$ ossi2le rosecution of securit4 la: #iolators3 Page 87 .

!inancial )egulatory *ut orities Countr4 Australia Bahamas France +ong 5ong 8a an Singa ore (5 (SA %egulator4 Authorit4 Australian Securities 6 "n#estments Commission *ru$ential %egulator4 Authorit4 Bahamas Central Bank Commission $es O erations $e Bourse Ban<ue $e France Securities 6 Futures Commission &onetar4 Authorit4 Financial Su er#isor4 Agenc4 Financial %econstruction Commission &onetar4 Authorit4 of Singa ore Financial Ser#ices Authorit4 'FSA) Securities 6 Exchange Commission 'SEC) (S Commo$it4 Futures Tra$ing Commission .ational Futures Association Page 88 .

)eporting &et ods * number of met ods exist dependent on ow t e local )egulator re0uires reporting to be effected  Automatic for:ar$ing of tra$e $etails 24 a com uterise$ exchange re<uiring no a$$itional re orting  Automate$ message transmission 24 the mem2er for confirmation>matching>instruction ur oses art of :hich is use$ to satisf4 transaction re orting re<uirements  File fee$s ro$uce$ from Front Office>Back Office>Controlling s4stems an$ sent $irect to %egulator Page 89 .

s internal regulator+ )esponsibilities include Ensuring com liance to rules of a regulator4 2o$4  +an$ling confi$ential information  Ensure that ersonnel are a$e<uatel4 an$ ro erl4 license$ to o erate in the market lace  &anaging anti0mone4 laun$ering regulations  &onitoring Em lo4ee *ersonal Tra$ing ro riate financial Page 90 .Compliance Compliance is t e /ank.

So far Co'ered I+ II+ III+ I1+ 1+ 1I+ &arket Participants Static .ata Trade Execution " Processing Trade Confirmation Trade Instruction Instruction . In'entory &anagement I:+ :+ !ails " !ail &anagement )econciliations Page 91 . *gent &atc ing :I+ Clearing " Custody :II+ Trade " Position *ccounting :III+ )egulatory " Compliance 1II+ Trade Settlement 1III+ Position .

Section !ourteen Conclusions .

Conclusions  %e$uce Settlement C4cles  "ncrease Straight Through *rocessing for tra$es  "ncrease use of central Counter arties  "ncrease use of /.ol$en Source1 static $ata  Acti#e management of collateral  &inimise %isk  &inimise O erational Cost  Offer increase$ ser#ice to clients  &anage increasing #olumes  &aximise internal efficienc4 Page 93 .

Section !ifteen
)eferences

)ecommended )eading
 &ichael Simmons

 Securities O

erations – A .ui$e to Tra$e 6 *osition &anagement

 Ste hen -al$e7  !a#i$ !ase4

 An "ntro$uction to =estern Financial &arkets  An "ntro$uction to E<uit4 &arkets  An "ntro$uction to %e
o &arkets

 &oora$ Chou$hr4  %o2ert +u$sen

 Treasur4 &anagement  The +an$2ook of E<uit4 !eri#ati#es  !ictionar4 of Finance 6 Banking

 Financial Engineering  Oxfor$ a er2acks
Page 95

Industry #ebsites
 htt @>>:::3crestco3co3uk>  htt @>>:::3$tcc3com>  htt @>>:::3euroclear3com> C%EST !e ositor4 Trust 6 Clearing Cor oration Euroclear

 htt @>>:::3Jas$a<3co3J >in$exMen3Js 8a anese Securities !e ositor4 Centre  htt @>>:::3isma3org>home3html "nternational Securities &arket Associations  htt @>>:::32ankofenglan$3co3uk>Links>setframe3html Bank of Englan$  htt @>>:::3fsa3go#3uk>  htt @>>:::3sec3go#>  htt @>>:::3nas$a<3com> Financial Ser#ices Authorit4 Securities Exchange Commission ,ational Association of Securities !ealers Automate$ Duotations3

 htt @>>:::3amex3com> American Stock Exchange  htt @>>:::3lon$onstockexchange3com>Lon$on Stock Exchange  htt @>>:::3lchclearnet3com> Lon$on Clearing +ouse  htt @>>:::3liffe3com> "nternational Financial Futures 6 O tions Exchange

Page 96

Industry #ebsites  htt @>>:::3iosco3org>iosco3html  htt @>>:::3i ma3org3uk>  htt @>>:::3is$a3org>in$ex3html  htt @>>:::3isla3co3uk>  htt @>>:::3isma3com>home3html  htt @>>:::3li2a3org3uk>  htt @>>:::3lsta3org>  htt @>>:::3sia3com> "nternational Organ Securities Commission "nternational *rimar4 &arket Association "nternational S:a s 6 !eri#ati#es Association "nternational Securities Len$ing Association "nternational Securities &arket Association Lon$on "n#estment Bank Association Loan S4n$ic Tra$ing Association Securities "n$ustr4 Association  htt @>>:::3securities0institute3org3uk Securities "nstitute  htt @>>$s ace3$ial3 i ex3com>Jhalse4> Com liance Exchange  htt @>>:::3:orl$0exchanges3org>  htt @>>:::3trio tima3com>tri> Fe$eration of Exchanges OTC !eri#ati#es termination ser#ice Financial %egulator4 Authorities Page 97  htt @>>:::3finan70a$ressen3$e>=E0fin0regulator43html .

EO Sungar$ S4stems Page 98 .Industry #ebsites  htt @>>:::3exchange0han$2ook3co3uk>Exchange +an$2ook  htt @>>:::3in#estor:or$s3com>  htt @>>:::3st forum3com>  htt @>>:::3st info3com>  htt @>>:::3af online3org> .lossar4 ST* Forum ST* "nfo Association for Financial *rofessionals  htt @>>:::3cal ers3ca3go#>in$ex3Js I2cN>in#estments>straightthrough3xml -irtual &atching (tilities '-&(s)L  htt @>>:::3omgeo3com>  htt @>>:::3sungar$3com> O&.

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