Operations
From Office - Sales, Traders and Market Makers, Repo Traders
Middle Office - Trade Support, Trade Matching, Investigate discrepancies, Contra and Securities Setup, Daily PnL and Position Reconciliation
Back Office - Settlement, Update Books and Records, Trade Enrichment, Custodian Details, Trade Reporting, Settlement Instruction, Counter Party Settlement
Books and Records
Stock Record - Activity Record - security movements/account; Summary Record - security positions/account
General Ledger - Daily Cash Listing - money movements/account; money balance/account (totaled as Trial Balance)
Open Trades
Settled Trades
Net Positions
Settled Positions
Used to assess counterparty risk and control operation cost
Other departments
Market Data
Reconciliation
Compliance
Accounting
Risk Management
Internal Audit
IT
Marketplaces
Exchanges - orders are executed by brokers as agents charging a commission
OTC - orders are executed by dealers as principal charging a markup
Stocks are traded mostly by agents, bonds are traded mostly by market makers
Debt Issuers
Corporate
Government
Agency
Sovereign
Issuance Life Cycle
Issuer appoints a lead writer
Lead writer invites other BDs to form a Syndicate
Synidate is repsonsible for distributing shares to investors
Traders and market makers trade with counterparts
Institutional clients' sales people
Agents acting on behalf of investors
Other broker/dealer
Internal entities
Middle Office
Trade Entry
Trade Matching
Customer Account and Security setup
Daily PnL
Reconciliation
Back Office
Capturing trade detail within settlement system
Update trading positions within books and records
Applying additional details and custodian details
Regulatory reporting
FoP = Free of Payment
DvP = Delivery vs Payment
FRN = Floating Rate Notes
Operational Activities
Trade Enrichment
Trade Validation
Trade Agreement
Transaction Reporting
Settlement Instructions
The Role of the Custodian Bank
Manage money and securities movement for tri-party repo
Affects trades in foreign market
Pre value date settlement instruction status
Settlement Failure
Trade Settlement
Reflecting Trade Settlement Internally
Overdraft from security purchase
Sell Repo
Borrow Cash
Transfer cash from cash account
Sell different currency in exchange for USD
Classic repo - interest rate fluctuates, coupon goes to original bond holder
Buy/sell back - interest rate up front, coupon goes to the cash lender
Security lending - borrow security to deliver to buyer to get money because the cost of borrowing is lower than the interest in custodian account when no money comes in from buyer
OATS - Order Audit Trail System
Exchanges and Clearing Houses
Trade lifecycle
- Trades take place between exchange members
- Trades are matched at exchange
- Trades are then passed to clearing system for comparison and netting
- Trades are settled on settlement date through custodian banks
Trade Matching
Trades held at exchange Omnibus Accounts by FCM (Futures Commission Merchant) for offsetting purposes. Omnibus accounts for the two parties are balanced and the "locked-in" trades are sent to clearing house for comparison.
- Post Trade
- Capture and verification
- Position keeping
- PnL
- Confirmation
- Settlement
- Customer services
- Reconciliation
- Collateral management
- Risk management
Role of clearing houses
- Mitigate counterparty risk
- Provide market data
- Prepare trade for settlement
DTC was originally created to provide continued netting
Futures and Options
CBOT - the Board
CME - came later
CBOE - Chicago Board Option Exchange
First futures contracts
Ginnie Mae Mortgage Bond future
Eurodollar future
Treasury Bond future
Derivative product volume
Equity indices
Interest rate
Individual equities
Corn and soybean
Oil and gas
Vanilla products
Futures
Forwards
Traded options
IR Swaps
Currency Swaps
Call and Put
Exotic
Caps and floors
Barriers
Amortizing Swaps
Forward Swaps
Futures are margin instrument requiring daily settlement
* Initial margin requirement
* Settlement with a clearing member
OTC Products
FRA
No clearing house guarantee
