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8/7/2019 Nitty Gritty of Trade
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Nitty - Gritty
of Trade
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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
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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
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Financial As
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PARTICIPANTS
Retail Investors Institutional
Investors
Agents for
Investors Exchange
Regulators
Custodian
Broker/ Dealers
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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’
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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
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Broker/Dealer/Investment Bank
Essential details recorded by
Front Office:
Security
Quantity
Price
Trade date
Value date Counterparty/ Exchange
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Pre- settlement Trade record
Post- Settlement Trade record
Settlement write-off. Unsettling a settled trade Internally
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Trade Settlement
Internally
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Nostro Reconciliation
Depot Reconciliation
Intercompany Reconciliation Inter-account Reconciliation
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Reconciliation
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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
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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