Life Cycle of a Trade

Training
Academy
Page 2
Introduction

Facilitator

Self

Course Outline

Break Timings

15 mins Forenoon

45 mins Lunch

15 mins Afternoon

Exectations
Page 3
Expectations
Static data
How trade is booked
Settlement and before settlement
Trade booking and settlement
Impact of incorrect settlement
Pre-matcing before a settlement
Entire life of a trade
!ront office " middle office
How trade is entered and ow it is booked
Page 4
#at is your Idea of
Life Cycle of a trade $$
Section %ne
Te &arket Participants
Page 6
Te &arket Participants - !acilitators

Brokers

!ealers

"n#estment Banks

Stock Exchanges

Agents

Securities Tra$ing Organisations

Custo$ians

Clearing Banks

%egulators
Page 7
Te &arket Participants - In'estors

"nstitutional "n#estors

&utual Fun$s '(nit Trusts)

*ension Fun$s

"nsurance Comanies

+e$ge Fun$s

Charities

"n$i#i$ual "n#estors
Page 8
Te &arketplace
Securities
Trading
House
Excanges
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ISS(E)S
ISS(E)S
Securities
Securities
Page 9
&arkets " Stock Excanges
* &arket is an en'ironment in wic securities are
bougt and sold+ Central to some market places is te
Stock Excange+

Tra$es execute$ o#er an Exchange are execute$ /On0

Exchange1 or /Exchange Tra$e$1

Other tra$es execute$ o#er the telehone are /OTC1 'O#er

the Counter) or ,on0Exchange Tra$e$

Each securities market has an associate$ an$

recognisa2le lace to effect settlement

E3g3 French .o#ernment Bon$s tra$e$ on the *aris Bourse settle in

Euroclear
Page 10
Stock Excanges
%egion Countr4 Financial
Centre
Stock Exchange
Euroe (5 Lon$on Lon$on Stock Exchange 'LSE)
Lon$on &etal Exchange
Lon$on "nternational Financial Futures 6 Otions Exchange
'L"FFE)
.erman4 Frankfurt !eutsche Bourse
Sain &a$ri$ Bolsa $e &a$ri$
Asia *acificChina +ong 5ong Stock Exchange of +ong 5ong
+ong 5ong Futures Exchange
China Shen7hen
Shanghai
Shen7hen Stock Exchange
Shanghai Stock Exchange
8aan Tok4o Tok4o Stock Exchange
Tok4o "nternational Financial Futures Exchange 'T"FFE)
Singaore Singaore Stock Exchange of Singaore
Singaore "nternational &onetar4 Exchange 'S"&E9)
Australia S4$ne4 Australian Stock Exchange 'AS9)
America (SA ,e: ;ork
Chicago
,e: ;ork Stock Exchange ',;SE)
Chicago Stock Exchange
Page 11
%ter &arket Participants

Saleseole

!ata *ro#i$ers

%egistrars

Couon *a4ing Agents

Tra$e &atching Ser#ices

Settlement "nstruction Communication &echanisms

Page 12
&arket Participants - Issuers
%rganisations occasionally need to raise cas,capital to expand
teir 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

T4e of "ssuer Examle
Cororations -o$afone '(5)
So#ereign Entities 5ing$om of !enmark
Local .o#ernments Cit4 of Lon$on
.o#ernment Agencies Fe$eral ,ational &ortgage Association
Suranational Organisations "nternational Bank for %econstruction 6
!e#eloment '=orl$ Bank "B%!)
Page 13
#ere does .eutsce /ank fit$
.eutsce co'ers multiple functions-

Broker

!ealer

Fun$>Asset &anager

"n#estment Bank

"ssuer

.lo2al Custo$ian

%etail Bank
Page 14
So far Co'ered
I+ &arket Participants
Section Two
Static .ata
Page 16
#at is Static .ata$
Static .ata is te common term to describe te store of
information used to determine te appropriate actions
re0uired for successful processing of eac trade+
!or Example-

Tra$ing Entities

Tra$ing Books :ithin each entit4

Counterarties

"nstruments

Currencies

*rices
Page 17
Sources of Static .ata

=here ossi2le? financial institutions tr4 an$ create a core

of /.ol$en Source1 static $ata to a#oi$ $ata conflicts in
inter0$een$ent s4stems

Comanies secialise in gathering an$ $istri2uting

financial $ata to institutions #ia@

Electronic File Fee$s

"nternet

Through on site terminals3

Page 18
Security .ata Pro'iders or .ata 1endors

%euters

Bloom2erg

Telekurs

%olfe 6 ,olan

S="FT

!TCC

Alert !irect>O&.EO

Stan$ar$ an$ *oors

Euroclear

=allstreet

S"AC

,SCC
Page 19
Counterparty Static .ata

,ame? A$$ress 6 Contact !etails

Authori7e$ Cre$it Limits

%elate$ Comanies

Stan$ar$ Settlement "nstructions

!ate of account set u

T4e of "nstitution

!ocumentation signe$

Tax Status

%egistere$ %eresentati#e

Confirmation !etails

Fax? Telex? Electronic Tra$e Confirmation? S="FT? Email

Page 20
Instrument Static .ata

T4e of instrument

E<uit4? Bon$? =arrant? !eri#ati#e? Commo$it4

"ssue

Short ,ame? Long ,ame? Si7e? !enomination? "ssuer

Couon !ates

Couon %ate? *a4ment Characteristics 0 AB>ACB? A>ACB etc

Alternati#e>External %eferences?

"S",? Common Co$e? %"C? Duick Co$e? Cusi etc

Exchange

Currenc4

&aturit4 !ate

Factors
Page 21
&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 %eorting '%egulator4 6 risk imact)

"ncrease$ cost er transaction $ue to re$uce$ ST*

Incorrect static data leads to reduced ser'ice and
dissatisfied customers+
Page 22
Static .ata Summary

Ba$ Static !ata results in re$uce$ ser#ice le#els to clients

$ue to rocessing hol$0us an$ ossi2le tra$e failure

Ba$ Static !ata imacts oerational risk an$ increases the

cost er tra$e rocesse$

Ba$ Static !ata contri2utes to oor internal 6 external

reorting imacting risk 6 reutation

Static !ata :ill continue to 2e an imortant $een$enc4

on the efficient rocessing of tra$es eseciall4 as the tra$e
lifec4cle :in$o: 2ecomes smaller

ST*TIC .*T*

&ust 2e oulate$ correctl4 :ithin all of the rele#ant s4stems3

&ust 2e o2taine$ from a cre$i2le source as timel4 as ossi2le3

Page 23
So far Co'ered
I+ &arket Participants
II+ Static .ata
Section Tree
Trade Execution " Trades Processing
Page 25
Straigt Troug Processing
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Tra$e Execution
Tra$e "nstruction
Tra$e Confirmation>Affirmation>&atching
Tra$e *rocessing
Tra$e -ali$ation
Tra$e Cature
Tra$e Settlement
"nstruction>Agent &atching
Fails 6 Fail &anagement
Tra$e Enrichment
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Page 26
#at is a Trade$

A legal contract 2et:een t:o EcounterartiesF3 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 27
Te !ront %ffice

Tra$ing

Sales

Broking

Cororate Finance

%eo !esk
Page 28
#y Trade$

Seculate

*rofit from rice mo#e or increase in #alue of the asset3

Accumulate

Benefit from $i#i$en$ on shares an$ interest on 2on$s3

+e$ging@

To seculate an$ accumulate3

To re$uce risk3
Page 29
Trade Execution
Trade execution tends to operate in one of tree ways
were 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

Comuterise$ Exchanges

Esta2lishe$ in the (5 as art of the Big Bang in 1GHC3 This term

alie$ to the li2erali7ation of the Lon$on Stock Exchange 'LSE)
:hen Tra$ing :as automate$3

Telehone
Page 30
Trade Execution
!urtermore Trades can be-

Duote !ri#en

&arket &akers <uote rices #ia comuterise$ screens sho:ing the

le#el at :hich the4 are reare$ to 2u4 an$ sell :ith the intention of
attracting 2usiness3

,AS!AD '(S) SEAD '(5)

Or$er !ri#en

Or$ers from sellers are matche$ :ith 2u4ersF or$ers electronicall43

9etra '.erman4) SETS '(5) SEATS 'Australia)

Electronic Communications ,et:orks 'EC,)

EC,Fs oerate on an electronic 2asis onl43

Euro0&TS Brokertec Archielago

Page 31
Trade Capture
)egardless of te trade execution,origin4 all trades must be
recorded formally by te market participant+

To u$ate a tra$ing osition for a secific 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 %eorting 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 32
!ront %ffice Trade .etail

Tra$ing Book

Tra$e !ate

!eal Time

-alue !ate

Oeration 'e3g3 Bu4>Sell? Len$>Borro:? "n>Out)

Duantit4

"nstrument>Securit4

*rice

Counterart4
Page 33
Trade 1alidation

Tra$e #ali$ation occurs to check if the tra$e information recei#e$ in

the Back office s4stems correson$s :ith the Front Office recor$3

Tra$e #ali$ation inclu$es the checking of constituent static $ata

information@

Examles inclu$e@
"s the securit4 recognise$ on the s4stemI
"s the Counterart4 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 34
Trade Enricment

Tra$e enrichment exists to a$$ secific 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

Examles inclu$e@

Calculation of cash #alues3

%egulator4 %eorting re<uire$3

Tra$e Confirmation re<uirements3

Selection of custo$ian $etails3

Selection of Settlement "nstructions an$ communication metho$3

Page 35
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Trades Processing
Section !our
Trade Confirmation
Page 37
Trade Confirmation,*greement

Tra$e Confirmation>Affirmation is an imortant rocess

re<uire$ to re$uce the risk of the traders P&L3

(ntil the counterart4 ackno:le$ges the tra$e $etail the

effect on the rice or <uantit4 of the tra$e is su2Ject to
change? imacting the tra$ers 2ook3

Tra$e agreement can 2e achie#e$ through@

Sen$ing tra$e confirmations to the counterart43

%ecei#ing tra$e confirmations from the counterart43

Tra$e or Contract &atching3

Tra$e Affirmation3
Page 38
Trade &atcing
Trade &atcing generally applies to mandatory
electronic matcing of trade details+

Both arties are re<uire$ to inut $etails to a central

matching facilit43

&atching results 'i3e3 matche$? unmatche$) are ro#i$e$

24 the tra$e matching facilit4 to 2oth arties3

Examles inclu$e@

Omgeo Central Tra$e &anager 'CT&)3

T%A9 '"nternationall4 tra$e$ $e2t 6 securities)3

!eositor4 Trust 6 Clearing Cororation '!TCC)

,ational Securities Clearing CororationFs Tra$e &atching Ser#ice3

',SCC)
Page 39
Trade *ffirmation
Trade *ffirmation relates to te electronic matcing of trade details
typically between securities institutions and Institutional clients+

Tra$e $etails are inut 24 the securities house an$ 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 resonse

is sent 2ack to the securities house3

Both arties must su2scri2e to the ser#ice3

Examles inclu$e@
OmgeoFs Oas4s .lo2al s4stem3
F"9 '.lo2al)
Oas4s !omestic 0 '(S)
!TC "! '"nstitutional !eli#er4) '(S)
Page 40
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
imact3

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

*romt actioning of all confirmation $iscreancies re$uces

tra$e risk3

Page 41
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
Section !i'e
Trade Instruction
Page 43
Settlement Instructions
Settlement Instructions are used to communicate te
mo'ement of securities and cas to te custodian+

Tra$e Agreement confirms the commercia detais of the

tra$e3

Settlement "nstructions in$icate the commercia detais of

the tra$e A,! the ocatio! an$ acco"!t detais for the
cash an$ securit4 mo#ements3 'Settlement !etails)3
Page 44
Instruction Content
Settlement Instructions tell te custodian,*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 45
Instruction Communication &etods
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 46
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
Section Six
Instruction,*gent &atcing
Page 48
#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$ counterarties

Ena2ling accurate fun$ing of cash in nostro accounts

&anaging stock in#entor4 in $eositories

Page 49
&atcing at Te Settlement *gent
%nce Instructions a'e been recei'ed at te Custodian4
te next lifecycle steps include-

"nstruction &atching

Custo$ian attemt to match the instruction to the counterart4

instruction3

Status ($ate

Attachment of the current status of the instruction3

'matche$>unmatche$>unkno:n)3

(nmatche$ %esolution

"n#estigation an$ resolution of non0matching instructions3

Tra$e Settlement

($ating the current status :ithin the securities tra$ing

organisationFs 2ooks an$ recor$s3
Page 50
Instructions &atcing- Example
Securities
Trading
House
Counterparty
Securities
House
Counterart4
CS! or "CS!
"nstruction
Comarison
5
6
6
7
7
8
Status Status
Settlement
"nstruction
Settlement
"nstruction
Status
&atche$ or
(nmatche$
Status
&atche$ or
(nmatche$
1 "nstructions sent in 24 Securities +ouse an$ Counterart43
K "nstruction matching occurs3
A Status is recor$e$3
4 "nstruction Status '&atche$>(nmatche$) is sent 2ack to 2oth arties3
Page 51
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
1I+ Instruction , *gent &atcing
Section Se'en
Trade Settlement
Page 53
Settlement Terminology
Trade settlement is te act of excanging securities and
cas between buyer and seller+

#a"e $ate > %o!tract"a Setteme!t $ate3

&ct"a Setteme!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 54
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 55
Types of Settlement

Full Settlement

*artial Settlement

Securities Onl4

Cash Onl4

Cross Currenc4 Settlement

,et Settlement
Page 56
Summary
Timely settlement of trades is an important part of te
Trade Lifecycle wit implications across te following
areas-

"n#entor4 &anagement

Cash &anagement

Settlement %isk

Cost &anagement

Firm %eutation
Page 57
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
1I+ Instruction , *gent &atcing
1II+ Trade Settlement
Section Eigt
Position,In'entory &anagement
Page 59
In'entory &anagement
&anagement of te 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 60
&etods of In'entory &anagement
If securities are una'ailable we can consider te
following-

"nternal Book Transfer3

Borro: securities from another firm account same $eot3

%ealignment3

Borro: securities from another firm account $ifferent $eot3

Stock Borro: Loan Tra$e3

Borro: the securities from the market3

Auto2orro:3

Borro: the securities from the custo$ian>central $eositor43

Execute a %eurchase Agreement '%eo)

!o nothing an$ let the tra$e fail3

Page 61
In'entory " !unding &anagement
Transmit Settlement "nstruction
&atch Settlement "nstruction at Custo$ian
Settle at Custo$ian
Securities
Choices
Cas
Choices
.o 9oting Lend )epo .o 9oting
/orrow 'ia
)epo
/orrow
(nsecured
*uto/orrow
Page 62
*utomated Lending " /orrowing
Ser'ice pro'ided by large Custodians and Central
Security .epositories-

Borro:ers

Borro: re<uire$ securities automaticall43

Borro: certain t4es of securit4 automaticall4 i3e3 Sanish Bon$s3

Borro: uon re<uest3

Sometimes use$ as a last resort $ue to the cost3

Len$ers

Len$ all securities automaticall43

Len$ certain t4es of securit4 automaticall43

Len$ uon re<uest3

Page 63
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 attemts 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 receits3

&anual ($ates

"n some cases it ma4 2e necessar4 to settle tra$e manuall4 an$ a

settlements secialist ma4 manuall4 recor$ the u$ate against the
tra$e recor$3
Page 64
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
1I+ Instruction , *gent &atcing
1II+ Trade Settlement
1III+ Position , In'entory &anagement
Section 9ine
!ails " !ail &anagement
Page 66
!ailing Trades and teir Impact

A faile$ tra$e is an4 securities transaction that $oes not

settle on #alue $ate3

The 2u4er an$ seller are imacte$ 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 imact $ue to mo#ement in the market causing a change in the

#alue of securities3 'mark to market)
Page 67
#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 68
Te Importance of &anaging !ails

Fails ,i ha#e cash imlications

"nterest claims on fails to recei#e3

"nterest exense on fails to $eli#er3

Fails make the reconciliation of cororate actions $ifficult

:hich can lea$ to material losses

%egulator4 "mact 0 "n some markets fines are imose$ for

late tra$e settlement

Australia Fines are imose$ $ail4 from #alue $ate to settlement

$ate for tra$es execute$ on the Australian Stock Exchange3

(50 Fines are imose$ 24 C%EST from a mem2erFs failure to

achie#e re0$efine$ settlement targets3
Page 69
Interest Claims

An i!terest caim is comensation 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 counterart43

Some marketlaces '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$ heling 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? imacting
their *6L3
Page 70
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
1I+ Instruction , *gent &atcing
1II+ Trade Settlement
1III+ Position , In'entory &anagement
I:+ !ails " !ail &anagement
Section Ten
)econciliations
Page 72
#at are )econciliations

%econciliations exist to check the accurac4 of the firms

2ooks an$ recor$s@

"nternall4 2et:een s4stems an$ $eartments

Externall4 :here securities an$ cash are hel$3

A %econciliation Break is a $iscreanc4 2et:een one

recor$ an$ another

All 2reaks shoul$ 2e in#estigate$? accounte$ for an$

correcte$ to ensure continue$ integrit4

Automation of reconciliation reorting facilitates timel4

in#estigation an$ resolution of 2reaks on a $ail4 2asis
Page 73
#y do we monitor reconciliations$

%egulator4

&anaging %isk

Cororate Actions
T4es of %econciliations

*osition %econciliations

Tra$e %econciliations

S4stem %econciliations
Page 74
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
1I+ Instruction , *gent &atcing
1II+ Trade Settlement
1III+ Position , In'entory &anagement
I:+ !ails " !ail &anagement
:+ )econciliations
Section Ele'en
Clearing and Custody
Page 76
Types of Custodian 6
Term !escrition Examle
Custo$ian An organisation that hol$s securities an$
cash on its clientsF 2ehalf an$ ma4 effect
tra$e settlement on its clientsF 2ehalf3
!eutsche Bank !omestic
Custo$4 Ser#ices
.lo2al Custo$ian 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,;
*ari2as
Local Custo$ian A custo$ian that oerates :ithin a secific
financial centre3
Cre$it L4onnais *aris
Banco Esirito Santo
Lis2oa
Su20Custo$ian A custo$ian :ithin a .lo2al Custo$ianFs
net:ork of custo$ians3
Citi2ank &ilan
Citi2ank &a$ri$
Page 77
Types of Custodian 5
Term !escrition Examles
Central Securities
!eositor4 'CS!)3







,ational Central
Securities !eositor4
',CS!)
An organisation that hol$ securities?
normall4 in 2ook entr4 formL usuall4 the
lace of settlement? effecte$ through 2ook
transfer3
A CS! that han$les $omestic securities of
the countr4 in :hich it is locate$3
!TC '(SA)
C%EST '(5 6 Eire)
8AS!EC '8*;)
CCASS '+5)
"nternational Central
Securities !eositor4
'"CS!)
A CS! that han$les $omestic an$
international securities3
Onl4 t:o organisations are recognise$ as
"C!SFs3
Euroclear 'Brussels)
Clearstream
'Luxem2ourg)
Settlement Agent An organisation that effects the exchange
of securities an$ cash on 2ehalf of its
clientsL resultant securities an$ cash
2alances ma4 or ma4 not 2e hel$3
Citi2ank &ilan
Citi2ank &a$ri$
Page 78
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
1I+ Instruction , *gent &atcing
1II+ Trade Settlement
1III+ Position , In'entory &anagement
I:+ !ails " !ail &anagement
:+ )econciliations
:I+ Clearing " Custody
Page 79
#at is a Corporate *ction$
*ny action by an Issuer wic may affect te in'estor-

The $istri2ution of 2enefits to existing sharehol$ers or

2on$hol$ers

Couon *a4ments

Cash !i#i$en$s

Stock !i#i$en$s

A change in the structure of an existing securit4

Stock Slit

Bonus Shares

A notification that ma4 or ma4 not re<uire a resonse from

the securities o:ner

Annual &eeting

-oting %ights
Section Twel'e
Trade " Position *ccounting
Page 81
Controlling
Te accounting group witin te bank is responsible for
correctly recording and monitoring all of te financial
transactions occurring witin te Securities Trading
House-
.eutsce /ank Controllers include-

Legal Entit4 Controller 'LEC)

%esonsi2le for !B Comanies3

Business Area Controller 'BAC)

%esonsi2le for ro$uct lines an$ the Business3

Central Functions %isk Controlling

%esonsi2le for &anaging %isk across the all $i#isions centrall43

Page 82
Controlling )esponsibilities

&onitor Stock>Securit4 *ositions

&onitor Cash Balances

Track Firm Books an$ %ecor$s

Create .oo$ *rocesses

Create Controls

%econcile Tra$e !ata

%econcile Cash Flo:

%econcile all 8ournal acti#it4

Page 83
Example Control )eports

%econciliations

*rofit an$ Loss Statement '*6L)

Balance Sheet %eorting 'BS)

Bu4 an$ +ol$ %eorting 'B6+)

&anagement "nformation %eorting '&"S)

Cre$it %isk %eorting 'C%ES)

Page 84
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
1I+ Instruction , *gent &atcing
1II+ Trade Settlement
1III+ Position , In'entory &anagement
I:+ !ails " !ail &anagement
:+ )econciliations
:I+ Clearing " Custody
:II+ Trade " Position
*ccounting
Section Tirteen
)egulatory " Compliance
)esponsibilities
Page 86
)egulators
)egulatory autorities exist witin te securities
industry to ensure-

All 2usiness un$ertaken :ithin the marketlace is $one in

the roer manner

To rotect in#estors :ho are articiants :ithin the

marketlace

.uar$ the reutation an$ integrit4 of the marketlace

&onitor acti#it4 :hich fails outsi$e of normal 2usiness

tra$ing ractice
Page 87
)egulator )esponsibilities

Assessing suita2ilit4 of securities tra$ing houses to

articiate :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 88
!inancial )egulatory *utorities
Countr4 %egulator4 Authorit4
Australia Australian Securities 6 "n#estments Commission
*ru$ential %egulator4 Authorit4
Bahamas Bahamas Central Bank
France Commission $es Oerations $e Bourse
Ban<ue $e France
+ong 5ong Securities 6 Futures Commission
&onetar4 Authorit4
8aan Financial Suer#isor4 Agenc4
Financial %econstruction Commission
Singaore &onetar4 Authorit4 of Singaore
(5 Financial Ser#ices Authorit4 'FSA)
(SA Securities 6 Exchange Commission 'SEC)
(S Commo$it4 Futures Tra$ing Commission
,ational Futures Association
Page 89
)eporting &etods
* number of metods exist dependent on ow te local
)egulator re0uires reporting to be effected

Automatic for:ar$ing of tra$e $etails 24 a comuterise$

exchange re<uiring no a$$itional reorting

Automate$ message transmission 24 the mem2er for

confirmation>matching>instruction uroses art of :hich is
use$ to satisf4 transaction reorting re<uirements

File fee$s ro$uce$ from Front Office>Back

Office>Controlling s4stems an$ sent $irect to %egulator
Page 90
Compliance
Compliance is te /ank;s internal regulator+
)esponsibilities include-

Ensuring comliance to rules of aroriate financial

regulator4 2o$4

+an$ling confi$ential information

Ensure that ersonnel are a$e<uatel4 an$ roerl4

license$ to oerate in the marketlace

&anaging anti0mone4 laun$ering regulations

&onitoring Emlo4ee *ersonal Tra$ing

Page 91
So far Co'ered
I+ &arket Participants
II+ Static .ata
III+ Trade Execution " Processing
I1+ Trade Confirmation
1+ Trade Instruction
1I+ Instruction , *gent &atcing
1II+ Trade Settlement
1III+ Position , In'entory &anagement
I:+ !ails " !ail &anagement
:+ )econciliations
:I+ Clearing " Custody
:II+ Trade " Position
*ccounting
:III+ )egulatory "
Compliance
Section !ourteen
Conclusions
Page 93
Conclusions

%e$uce Settlement C4cles

"ncrease Straight Through *rocessing for tra$es

"ncrease use of central Counterarties

"ncrease use of /.ol$en Source1 static $ata

Acti#e management of collateral

&inimise %isk

&inimise Oerational Cost

Offer increase$ ser#ice to clients

&anage increasing #olumes

&aximise internal efficienc4

Section !ifteen
)eferences
Page 95
)ecommended )eading

&ichael Simmons
Securities Oerations A .ui$e to Tra$e 6 *osition &anagement

Stehen -al$e7
An "ntro$uction to =estern Financial &arkets

!a#i$ !ase4
An "ntro$uction to E<uit4 &arkets

&oora$ Chou$hr4
An "ntro$uction to %eo &arkets

%o2ert +u$sen
Treasur4 &anagement

Financial Engineering
The +an$2ook of E<uit4 !eri#ati#es

Oxfor$ aer2acks
!ictionar4 of Finance 6 Banking
Page 96
Industry #ebsites

htt@>>:::3crestco3co3uk> C%EST

htt@>>:::3$tcc3com> !eositor4 Trust 6 Clearing Cororation

htt@>>:::3euroclear3com> Euroclear

htt@>>:::3Jas$a<3co3J>in$exMen3Js 8aanese Securities !eositor4 Centre

htt@>>:::3isma3org>home3html "nternational Securities &arket Associations

htt@>>:::32ankofenglan$3co3uk>Links>setframe3html Bank of Englan$

htt@>>:::3fsa3go#3uk> Financial Ser#ices Authorit4

htt@>>:::3sec3go#> Securities Exchange Commission

htt@>>:::3nas$a<3com> ,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 Otions

Exchange
Page 97
Industry #ebsites

htt@>>:::3iosco3org>iosco3html "nternational Organ Securities Commission

htt@>>:::3ima3org3uk> "nternational *rimar4 &arket Association

htt@>>:::3is$a3org>in$ex3html "nternational S:as 6 !eri#ati#es Association

htt@>>:::3isla3co3uk> "nternational Securities Len$ing Association

htt@>>:::3isma3com>home3html "nternational Securities &arket Association

htt@>>:::3li2a3org3uk> Lon$on "n#estment Bank Association

htt@>>:::3lsta3org> Loan S4n$ic Tra$ing Association

htt@>>:::3sia3com> Securities "n$ustr4 Association

htt@>>:::3securities0institute3org3uk Securities "nstitute

htt@>>$sace3$ial3iex3com>Jhalse4> Comliance Exchange

htt@>>:::3:orl$0exchanges3org> Fe$eration of Exchanges

htt@>>:::3triotima3com>tri> OTC !eri#ati#es termination ser#ice

htt@>>:::3finan70a$ressen3$e>=E0fin0regulator43html
Financial %egulator4 Authorities
Page 98
Industry #ebsites

htt@>>:::3exchange0han$2ook3co3uk>Exchange +an$2ook

htt@>>:::3in#estor:or$s3com> .lossar4

htt@>>:::3stforum3com> ST* Forum

htt@>>:::3stinfo3com> ST* "nfo

htt@>>:::3afonline3org> Association for Financial *rofessionals

htt@>>:::3calers3ca3go#>in$ex3JsI2cN>in#estments>straightthrough3xml
-irtual &atching (tilities '-&(s)L

htt@>>:::3omgeo3com> O&.EO

htt@>>:::3sungar$3com> Sungar$ S4stems