Simplified Step-by-Step Guide to the Trade Life Cycle
1. Trade Execution
• What Happens: Buyer and seller agree to terms (price, quantity, etc.).
• How: Via phone, email, Bloomberg, or trading platforms.
2. Trade Capture
• What Happens: Trade details are entered into internal systems.
• Key Fields Captured:
• Trade date
• Settlement date
• Security ISIN
• Quantity
• Price
• Counterparty name
• Buy/sell flag
3. Trade Enrichment
• What Happens: Additional data is added to the trade for downstream processing.
• Examples:
• Broker commission
• Market code
• Standing Settlement Instructions (SSI)
4. Trade Confirmation
• What Happens: Trade details are sent to the counterparty to confirm the terms.
• How: Email, SWIFT, fax (still used!), or electronic platforms.
• What’s Included:
• Trade reference number
• ISIN code
• Counterparty details
• Settlement details (Nostro/Vostro, custodian info)
• Governing rules/market
• Silent Affirmation: If no reply, silence = agreement.
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5. Trade Matching
• What Happens: Your trade details are compared with the counterparty’s.
• Match Statuses:
• Matched – All details (within tolerance) align.
• Unmatched – Differences exist.
• Alleged – Counterparty sent instruction, but you didn’t.
• Tolerance: Example - $25 cash mismatch can still be "matched" in Euroclear.
6. Trade Settlement
• What Happens: Securities and cash are exchanged.
• Types:
• Delivery vs. Payment (DvP) – Cash and securities exchanged simultaneously.
• Free of Payment (FoP) – Securities move without cash.
• Cash only – Just funds move.
• Settlement Instruction Contents:
• Trade ref ID
• ISIN
• SSI (accounts to use)
• Deliver/receive flag
• Settlement currency & date
• Timing: Must match across both parties by COB in their time zones (T+1, T+2, etc.).
7. Failed Trades
• Why Fails Happen:
• No securities (CSEC/USEC)
• No cash (OTH/PROV)
• Mismatched or missing instructions
• Statuses:
• FUT – Future-dated, ready to settle
• SET – Settled
• UNM1 / UNM2 – Unmatched, priority levels
• FAIL – Matched but did not settle
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• Resolution:
• Email/call counterparty
• Amend and resend instructions
• Escalate internally if unresolved
8. Partial Settlement
• What Happens: Only part of the trade is settled if full quantity/cash is unavailable.
• Pro Rata Basis: Buyer pays partial amount; seller delivers partial quantity.
• By Market Rules or Agreement.
9. Buy-In Process (Enforcement)
• When Used: Counterparty fails to deliver securities.
• How:
• Send warning and timeline to counterparty.
• If unresolved, market maker steps in, buys securities elsewhere.
• Seller bears the cost difference.
10. Books & Records Update
• What Happens: Settlement is finalized in official ledgers.
• Why Important:
• Legal proof of ownership
• Financial reporting
11. Reconciliation (Recon)
• What Happens: Final validation of all trade details against all parties.
• Checks:
• Trade ID matches
• Cash/securities received
• Instructions logged properly
• Purpose:
• Eliminate exposure
• Ensure books reflect reality
• Spot breaks or discrepancies
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Final Notes:
• STP (Straight Through Processing) depends on accurate data.
• Reputational damage and monetary loss happen from failed trades.
• Custodians and CSDs (like Euroclear, Clearstream, DTC) play a critical role.
End of Trade Life Cycle Guide.
