trading life cycle
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tradingTRANSCRIPT
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TCS Confidential15 May 2012
Trading life cycle
Shilpa Billur
TCS Business Domain Academy
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Financial System The Big Picture
Savings Deficit Units
(Corporate Sectors)Banks and Financial Institutions:
Central Bank,Mutual funds,
Insurance,Pension Funds,
Development Banks,NBFC,
Commercial Banks(Public, Private &
Foreign Banks),Co-operative banks,
Investment BanksFunds Transfer
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Savings Surplus Units
(households,
consumers)
Financial Intermediaries
Capital Markets - Primary, Secondary
Debt Markets, Money Markets
Funds Transfer
Funds Transfer
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Financial System An Interwoven Web?
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The financial system helps determine both the cost and volume of credit
Savings Function
Liquidity Function
Payment Function
Risk Function
Policy Function
Functions of a Financial System
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Policy Function
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GOI
Ministry of Finance
RBISEBIRegistrar of
Companies
GOI
Dept of Co. Affairs
Structure of Indian Financial System
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Depositories Companies
Broker
Dealers
Clearing
Corporations
Stock
Exchanges
Mutual
FundsBanks
Merchant
Bankers
Registrar &
Transfer
Agents
Primary
Dealers
Depository
Participants
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Shares and Securities
What is a Share ?
A share is exactly what it says it is
A share of business
Share is a share in share capital of a company
What is a Security?
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What is a Security?
Securities cover wider range of instruments and
includes share, debentures, bonds
Security - different meanings - physical, financial,
data etc.
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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.
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The BUYER must pay the agreed purchase price on the
agreed value date.
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Why trade?
Speculate
Profit from price move or increase in value of the asset.
Accumulate
Benefit from dividend on shares and interest on bonds.
To reduce risk. (Hedging)
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Securities Trading Key players
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Key Players
Company/ Issuer - The corporate entity that issues securities, which are traded
on the stock exchange e.g. Reliance Industries Ltd.., Proctor & Gamble, IBM.
One company may have its securities listed on many exchanges
Investor - An individual or a company which buys and sells securities with an
investment objective. An individual , a company, a corporate entity, or a group
of individuals who buy and sell securities. An individual investor could be a retail
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client, and institutional investors could be an Investment Manager, Mutual
Fund, Bank, Companies, that invest in securities either on behalf of their clients
or on their own account e.g. UTI (mutual fund), Axa Investment Managers
(Investment Manager).
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Exchanges
A platform for the buyer and the seller to trade in the securities e.g.
New York Stock Exchange formed in 1792
London Stock Exchange, NASDAQ, Chicago Mercantile Exchange,
Chicago Board Of Trade.
In India - NSE, BSE
Performs various roles such as:
Admission of securities for trading - listing
Admission of members who can trade in the securities
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Admission of members who can trade in the securities
Defining market segments like Equity / Debt / Derivative Market segment
Defining market indices like Sensex, Dow Jones, Nifty
Defining price range for trading
Monitoring the trading activities - surveillance on day to day basis.
Regulating the activities of the members of the exchange.
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Key players Investment manager- The agency which acts on behalf of its clients, and buys or sells
securities through brokers, on various stock exchanges e.g. Alliance Capital
Management. Also provides value added services like portfolio management to its clients
May operate in various instruments, markets regions of the world May have an identified
set of brokers and custodians through which it deals.
Brokers/Dealers - A member of a given stock exchange, authorised to trade only on that
exchange. Can be a member of multiple exchanges at a time. Can trade on multiple
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exchanges at a time. Can be an individual or a corporate entity like Merrill Lynch, MSDW.
Only members can trade on the exchange - investors cannot trade directly If a member
gives both buy and sell quotes for a given security, he is called a market maker in that
security. If he deals on his own account, he is called dealers Has final obligation to
honour the trades done by him on the exchange.
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Key Players
Custodian
The agency which keeps custody of physical and electronic holdings on behalf of their
clients (investors).e.g. HSBC, ABN AMRO Bank.
They also provide additional services like cash management, accounting, taxation,
reporting and effecting corporate actions on the clients holdings.
They also execute settlement instructions received from the client or clients broker or
investment manager.
They may operate across different countries and act as Global Custodians.
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They may operate across different countries and act as Global Custodians.
As global custodians, they act through central security depositories, International
central security depositories and local agents.
As Local Custodian or Local Agent they represent the global custodians in the domestic
market.
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Clearing Corporation
The agency which keeps track of buy and sell trades done by the members e.g.
National Securities Clearing Corporation (NSCCL)
It calculates the obligations for the member, for a given trading period
May also impose and collect margins on behalf of the exchange on outstanding
positions of the members
Ensures the settlement of the trades done on the stock exchange
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May act as a clearing and settlement body for one or more stock exchanges
May also act as Central Counterparties in case obligations are netted.
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Major Functions of a Typical Securities Firm
Front Office Middle Office Back Office
CustomerInteractions
Trade Capture, Market Data
Research & Analytics
Managing Suppliers, Counterparties
ManagingRisk
ManagingCustomer Support
Trade Verification
Trade & Payment Confirmations
Rate Resets & Fixing
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& Analytics
Market Making
Customer Support
Trading P&L
PositionKeeping
& Fixing
Clearance & Settlement
Reconciliation
Compliance & Reporting
Accounting Links
Reconciliation
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Overview of the Indian Stock Market
BSE set up in 1875 in Bombay under a Banyan Tree situated at what is today
called DALAL STREET.
22 Stock Exchanges exist in India.
OTCEI - Over The Counter Exchange of India was established in 1992 to meet
the needs of smaller companies. Is the first Screen Based Trading System in
India.
NSE - National Stock Exchange of India - 1993 which popularized the Screen
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Based Trading through V Sat based Network of Computer Terminals.
NSE and BSE contribute more than 70% business in the Indian Market.
National Securities Depository Limited (NSDL) and Central Depository for
Securities Limited (CDSL) are two Depositories.
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Life cycle of an Institutional trade
Investment Decision
Order
Indication
Order
Management
Clearing &
Settlement
Reconciliation
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Trade
ConfirmationTrade Execution
Management
Trade Allocation
Settlement
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Stages that a trade goes through in its lifetime
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Workflow through out the life cycle of trade
Various Stages
Pre-trading
Trading
Post- trading , Pre -settlement
Settlement
Post Settlement
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Post Settlement
Buy side and Sell side Settlement of the trade
Participants various systems in Front Office, Middle Office and Back Office
need to be integrated.
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Trade Execution
Trade execution tends to operate in one of three ways
where sellers and buyers execute trades:
Trading Floor
Traditional method of trading face to face on the trading floor of a Stock
Exchange.
Computerised Exchanges
Established in the UK as part of the Big Bang in 1986. This term applied
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Established in the UK as part of the Big Bang in 1986. This term applied
to the liberalization of the London Stock Exchange (LSE) when Trading
was automated.
Telephone
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Trade Execution
Trades can be:
Quote Driven:
Market Makers quote prices via computerised screens showing the level at
which they are prepared to buy and sell with the intention of attracting
business.
Order Driven:
Orders from sellers are matched with buyers orders electronically.
Xetra (Germany) SETS (UK) SEATS (Australia)
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Xetra (Germany) SETS (UK) SEATS (Australia)
Electronic Communications Networks (ECN).
ECNs operate on an electronic basis only.
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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
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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:
Is the security recognised on the system?
Is the Counterparty account recognised?
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Is the Counterparty account recognised?
Is the Trader allowed to trade on the trading book?
Is the trading book valid to trade security x?
Is the value date a valid settlement date in the location of settlement?
All detected errors must be investigated and corrected
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Sending and Receiving trade confirmations
Trade confirmations are generated using trade data and static information
held on the counterparty account
Confirms can be sent or received via:
Fax
Telex
SWIFT
Email (in some markets)
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Email (in some markets)
Paper
Generally trade confirmations are checked and any discrepancies are
reported back to the counterparty if:
Trade data differs (security, price, quantity, value date).
Trade is not recognised.
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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
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Settlement Instructions indicate the commercial details of
the trade AND the location and account details for the
cash and security movements
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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.
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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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Trade Settlement
Trade settlement is the act of exchanging securities and cash between buyer
and seller.
Value Date is the intended date of delivery and payment also known as
Contractual Settlement Date.
Actual Settlement Date applies to the actual date the exchange took place.
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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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Trade Settlement
Timely settlement of trades is an important part of the Trade
Lifecycle with implications across the following areas:
Inventory Management
Cash Management
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Settlement Risk
Cost Management
Firm Reputation
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Updating Positions
Once a trade has settled it is essential to update the firm internal books and
records to ensure:
The transaction is no longer shown as outstanding.
The securities are shown as having been received in so they can be sold
on.
The securities are shown as having been delivered out so more can be
purchased if required.
The cash is showing as having being paid out and additional cash can be
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The cash is showing as having being paid out and additional cash can be
borrowed if required.
The cash is shown as having been received in so it can be lent out to
make interest.
To retain full control of all assets and liabilities at all times. And facilitate
further trading.
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How do trades and positions get updated?
Instruction statuses are sent in by the custodian (fully settled, partially
settled, failed etc).
The system attempts to locate the relevant trade in its internal books and
records.
Once found it records the status update against the transaction.
It will also automatically update the relevant security positions and
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balances reflecting the delivery or receipts.
Manual Updates
In some cases it may be necessary to settle trade manually and a
settlements specialist may manually record the update against the trade
record.
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What are Reconciliations
Reconciliations exist to check the accuracy of the firms books and records:
Internally between systems and departments
Externally where securities and cash are held
A Reconciliation Break is a discrepancy between one record and another.
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All breaks should be investigated, accounted for and corrected to ensure
continued integrity.
Automation of reconciliation reporting facilitates timely investigation and
resolution of breaks on a daily basis.
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Why do we monitor reconciliations?
Regulatory Requirements
Requirement to show we are acting responsibly in the market place.
Trading within recommended guidelines.
Maximum security holdings in certain Firm entities.
Managing Risk
Understanding true trading position.
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Understanding true trading position.
Understanding true cash balances.
Calculating correct Corporate Action entitlement from true security holding.
Correctly reflect changes caused by Corporate Actions to the relevant
internal accounts held on all systems. (FO & BO)
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Pre-order stage of a trades life cycle
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Order stage of a trades life cycle
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Trade Execution
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Post Execution Activities in trade life cycle
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Trade confirmation activities in trade life cycle
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Trade SettlementTrade Settlement
SettlementSettlement
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Inventory Management
Cash Management
Securities Lending & Borrowing
DVP,FOP
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Trade Custody
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Buying/Selling a Security
ExchangeInvestor member
Internet
Buy
Order
Sell
Order
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Investor member
Phone/Fax
Order
Routing
System
TRADE
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Clearing and Settlement of a trade
ExchangeTRADE
Pay-in
BuyerBuying member
Pay-outMatching
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TRADEPay-in
Selling memberSeller
Pay-out
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Typical Securities Trade Life cycle
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Pre-Trade-------1 - 2
Trade------------3 - 5
Post-Trade------6 -12
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Thank You