nitty gritty of trade

8/7/2019 Nitty Gritty of Trade

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Nitty - Gritty

of Trade

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mailto:[email protected]




Bank - a multi function firm

Acts as... Broker / Dealer

Fund Manager

Investment Bank

Issuer

Global Custodian

A Multi National Bank

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CONCEPT OF BUYING AND SELLING

• Who wants to buy and Sell?

– BUYER like me and you

– SELLER like he and she

• What you want to buy and sell?

– Any product from Grain to Plane

• Where you want to buy and Sell?

– An organized Market Place

BUYER SELLER

Market

Trade

Satisfied

Buyer & Seller

Who

wants

to Buy &

Sell

What

you want to

Buy & Sell

Where you

want to

Buy & Sell

Market



What is a Trade?

A legal contract between two ‘counterparties’; theseller and the buyer

The seller must deliver what he has sold to thebuyer

The Buyer must pay for what he has purchased

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Why Trade?

To speculate and accumulate

Speculate - hope to profit out of a pricemove or increase in value of the asset

Accumulate - benefit from dividend onshares and interest on bonds



Financial As

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PARTICIPANTS

Retail Investors Institutional

Investors

Agents for

Investors Exchange

Regulators

Custodian

Broker/ Dealers



Bid - What a market maker will be prepared topay

Offer - What a market maker will prepared to sell

at The difference between the two is the spread

E.g. (bonds) 99.5-100. There is 0.5% spread

(equities) 325p-327p

Prices - Bid, Offer and Spread

The Role of the Market Maker

Will make two way prices on thosesecurities in which he ‘makes a market’



Types of Market

Order Driven Market An order driven market is one in

which all of the orders of bothbuyers and sellers aredisplayed, detailing the price atwhich they are willing to buy or

sell a security and the amountof the security that they arewilling to buy or sell at thatprice.

Advantage: Transparency inSystem.

Disadvantage: No guarantee of order execution.

Quote Driven market A quote driven market

only displays the bid andask offers of designatedmarket makers, dealers.

Advantage: Guarantee of order execution andliquidity in the system.

Disadvantage: No Transparency.

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Order is a request to buy or sell the securities, givenby an investors (such as retail and institutional).

Standard features: Buy/Sell, Qty, Price.

Price related features: Market order, Limit order, Stop-Loss.

Time related features: Fill or Kill, Good till Cancel.

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Orders



Broker/Dealer/Investment Bank

Essential details recorded by

Front Office:

Security

Quantity

Price

Trade date

Value date Counterparty/ Exchange



Transaction Type- Principal

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Trading book transfer Transaction

T

rading

Book

Transfe

r

Trade1

TradingBook A

TradingBook B

STO

Securities

Cash

Seller We are Buyer

Internal

Counterparty

* No settlement Instructions and No External Cash/Securities Movement



Principal Sale Transaction

T

rading

Book

Transfe

r

Trade1

TradingBook A

TradingBook B

STO

Securities

Cash

Seller We are Buyer

External

Counterparty

Transaction Type- Principal



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Transaction Type- Agency

T

rading

Book

Transfe

r

Trade1

TradingBook A

TradingBook B

STO

Securities

Cash

Seller We are Buyer

ClientExternal

Counterparty



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Trade Cash Value Calculation

Why Calculation? Avoid Losses

Avoid Mismatch of Trade Details

Provide high Quality Service to Clients

Responsibility for the calculation of trade cash values foroperational purpose resides within Middle office/ tradesupport area or the settlement dept.

Final Cash Amount is defined as Net Settlement Value (NSV).



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Gross Cash Value Calculation

GCV is derived by applying the price to thequantity traded.

For Equity Price Types:

GCV= No. of shares * Price per share

For Bond Price Types: Bonds are traded at apercentage price of relevant to Currency andface value of the bond. Face value * Price

100

Clean Price = quoted price

Dirty price = clean price +accrued interest



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Two set of information required to calculate

NSV: The Gross Cash Value (GSV)

Any additional Trade amounts

Additional Trade Amounts can be categorisedas follows :

1. Compulsory trade amounts

2. Optional trade amounts

3. Internal trade amounts



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Obligated to charge because of market practice.

• Stamp Duty

• Purchase & Sales tax

• Transaction Levies

• Registration Costs

• Accrued Interest

Examples:

Honk Kong: stamp duty of 0.125% and transaction levy of 0.007%

UK: Stamp duty of 0.5% is payable on equity, & PTM Levy at a fixedGBP 0.25 is payable on purchase and sales over GBP 10,000.00

Japan: Registrars may charge a fee for registration of Securities

Compulsory Trade Amounts



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Accrued Interest

Cash Value of Accrued Interest:

Face Value * Coupon Rate %* No. of Days

Annual Divisor



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Choose to charge, that will be added toGCV.

• Administration fee

• Commission

Depends on monetary valueLocation of the market

Availability of the security.

Commission is negotiable.

It is % of Gross Cash value.

It is used to make Profit.

Optional Trade Amounts



Cash value that is not charged to Counterparty. Sales Credit

Processing instruction with Custodian

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Internal Trade Amounts

Net Settlement value

Final Amount paid by the Buyer or received by seller.

Derived from:

a. Calculating the GCV

b. Adding or Subtracting the Additional Trade Amounts



Maintaining Static Data

It is of great importance to maintainaccurate static data for:- Counterparties Instruments

Firm Accounts Instructions

Incorrect static data may lead to delayedor unmatched transactions anddissatisfied customers

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Static Data -

Counterparties Full name and address

Contact names

Credit limits

Type of Counterparty

Confirmation details

Communication method, e.g. telex,fax, SWIFT

Standard Settlement Instructions

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Static Data -

Instruments Type of instrument:- equity, debt, options,warrant.

Coupon rate and payment characteristics

30/360, A/360 etc Coupon payable dates or record date External references, e.g.. ISIN, SEDOL, TKR.

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Impact of Trade components:

1. Trading book

2. Trade date

3. Trade time

4. Settlement date

5. Value date

6. Operation

7. Quantity

8. Security

9. Price

10.Counterparty

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Trade Capture in Front Office



Failure of Trade to arrive in Middle office & Backoffice system.

Validation of trade with static data items.

Finding Exceptions. Position update in Settlement System

To avoid the above issue: Trade- by- TradeReconciliation is conducted.

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Why Trade Capture – MO & BO

System



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Trade Enrichment



Steps 1: The basic trade details are captured within the

middle office system, whether having fed from a front

office system or input manually.

Step 2: The basic trade details are compared with theinformation held within the static data repository and

(if set up) the default information is selected.

Step 3: The selected defaults are attached to the basic

trade detail to form the enriched trade.

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Trade Enrichment



Trade components requiring enrichment are :

Calculation of Cash values

Counterparty trade confirmation requirements. Selection of Custodian details.

Method of transmission of settlement instructions.

Determining the Method of Transaction Reporting.

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Trade Enrichment Components



Calculation of Cash values

Below trade components calculate the cash value:

1. Operation:

Client purchases UK Equity attract Stamp Duty, but sales do not.

Only seller of US Equity are required to pay a Securities &Exchange Commission fee.

2. Security Group: Stamp duty is payable on Irish Equities, but not on Japanese

Equities.

Accrued interest is applicable on Straight Bonds & not on ZeroCoupon Bonds.

3. Counterparty Type:

Sales credits are normally calculated on trades with InstitutionalClients, but not on trades with other STO’s.

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Trade Validation

Having Executed, captured and enriched a trade,various task could now be actioned.

Issuing a Trade Confirmation

Reporting the trade to regulatory authorities.

Issuing Settlement Instructions



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Steps 1: Trade is been captured and enriched and

now subject to trade validation. Step 2: Trade details is compared with present

validation rules ( Trade Price), feed of currentmarket price is used.

Step 3a: If validation rules are passed, the trade isprocessed for trade agreement and reporting.

Step 3b: if validation fails, trade will be routed for“exception” handling.

Step 4: Trade will be forwarded to appropriateperson or group.

Step 5: Trade is authorized having beeninvestigated and modified to correct.

Step 6: Trade is updated and then release for

Trade Validation



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Trade Agreement

• Act of gaining the agreement of the trade detailswith the counterparty.

Trade agreement can be achieved through:

Issuance of outgoing trade confirmations to thecounterparty.

Receipt of incoming trade confirmations to thecounterparty.

Trade Matching

Trade Affirmation



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Trade Confirmation TransmissionMethods• Counterparty has preference for the medium by

which trade confirmation is received.

• Information is held as part of the static data for thespecific counterparty.

Types of media:• Fax : Handwritten or typed message

• Telex : Printed message

• SWIFT: Society for Worldwide Interbank Financial

Telecommunication.

• E-mail: Electronic message



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Efficient and Risk free

method of Settlement is

Delivery Vs Payment .

Exchange of securities and

cash is known asSettlement.

Is there any risk involved ?

Local Agents are referred as Custodians.

Custodian is responsible for exchanging securities &cash as a result of buying and selling by theExchange.

Buyer

Seller

Market

Place

Trade

Settlement

Exchange of

Assets

EXCHANGING SECURTIES AND CASH



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Role of “The Custodian”



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Selection of Custodian Details

Selection of relevant custodian details for both thetrading company and counterparty is affected by:

1. Trading Company2. Transaction Type : Securities and Forex

3. Security Group:Eg: US equities to settle in New York custodian

New Zealand Govt bonds will settle atWellington custodian



Settlement Cycle

International securities transactionstraded normally settle T+3

UK equities T+3 (What is India?)

Trades in new issues and domesticmarkets may have a different settlementlife cycle

Trades that do not settle on settlementdate are ‘fails’

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Trade Settlement Methods

Delivery versus Payment

Free of Payment

Physical delivery

Cross Border Settlement



Settlement Instruction issued to Custodian Matched Instructions

Unmatched Instructions

Advisory Instructions

Primary causes of non-matching instructions:

Inaccurate trade recording

Delayed transmission of settlement instructions

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Settlement InstructionStatuses



Any securities transaction that does not settle

on value date (settlement date).

Settlement failure can be caused by a variety of factors.

Non-Matching Settlement Instructions

Insufficient Securities

Insufficient Cash or Collateral

Resulting in:

Fail to receive - purchase does not settle

Fail to deliver - sale does not settle

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Settlement Failure



Movement of securities and cash can occur in differentways:

Full Settlement: no outstanding cash or securities.

Partial Settlement: partial delivery, partial settlement.

There would be change in settlement instructions toprocess Partial settlement.

Securities Only Settlement.

Cash Only Settlement.

Cross- Currency Securities Settlement.

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Trade Settlement Types



Pre- settlement Trade record

Post- Settlement Trade record

Settlement write-off. Unsettling a settled trade Internally

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Trade Settlement

Internally



Nostro Reconciliation

Depot Reconciliation

Intercompany Reconciliation Inter-account Reconciliation

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Reconciliation



The securities industry recognises the need forcontinued evolution, in order to address theobjectives of:

Minimising Risk Minimising Operational Cost

Servicing Clients

Managing Increasing Trading volumes and

Maximising Internal efficiency- static data.

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Objective andInitiatives



Conclusions

With ever growing volumes and thedesire to reduce the settlement cycle

comes the need for... Higher levels of STP

Higher levels of operating efficiency

Well qualified operations personnel.

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Questions???

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THANK

YOU

[email protected]



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