Nitty - Gritty

of
Trade

sheetal.raj@hcl.com
Bank - a multi function firm

 Acts as...
 Broker / Dealer
 Fund Manager
 Investment Bank
 Issuer
 Global Custodian
 A Multi National Bank

2
 CONCEPT OF BUYING AND SELLING
• Who wants to buy and Sell?
– BUYER like me and you
BUYER SELLER
– 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?
Market
– An organized Market Place

Who What
wants you want to Trade
to Buy & Buy & Sell
Sell
Market

Satisfied
Buyer & Seller
Where you
want to
Buy & Sell
What is a Trade?

 A legal contract between two ‘counterparties’; the

seller and the buyer
 The seller must deliver what he has sold to the
buyer
 The Buyer must pay for what he has purchased

4
Why Trade?

 To speculate and accumulate

 Speculate - hope to profit out of a price
move or increase in value of the asset
 Accumulate - benefit from dividend on
shares and interest on bonds

5
Financial As
PARTICIPANT
S
 Retail Investors
 Institutional
Investors
 Agents for
Investors
 Exchange
 Regulators
 Custodian
 Broker/ Dealers

6
The Role of the Market Maker
 Will make two way prices on those
securities in which he ‘makes a market’

Prices - Bid, Offer and Spread

 Bid - What a market maker will be prepared to
pay
 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
7
Types of Market
 Order Driven Market
 An order driven market is one in
which all of the orders of both
buyers and sellers are
displayed, detailing the price at
which they are willing to buy or
sell a security and the amount
of the security that they are
willing to buy or sell at that
price.
 Advantage: Transparency in
System.
 Disadvantage: No guarantee of
order execution.
Quote Driven market
 A quote driven market
only displays the bid and
ask offers of designated
market makers, dealers.
 Advantage: Guarantee of
order execution and
liquidity in the system.
 Disadvantage: No
Transparency.
8
9
Orders
 Order is a request to buy or sell the securities, given
by 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.

10
Broker/Dealer/Investment Bank

Essential details recorded by

Front Office:
 Security
 Quantity
 Price
 Trade date
 Value date
 Counterparty/ Exchange

11
Transaction Type- Principal

Trading book transfer Transaction

Seller We are Buyer

STO
Trading Book
Transfer

Securities Trading
Trade Trading
1 Book A Book B
Cash
Internal
Counterparty

* No settlement Instructions and No External Cash/Securities Movement

12
Transaction Type- Principal
Principal Sale Transaction

Seller We are Buyer

STO
Trading Book
Transfer

Securities Trading
Trade Trading
1 Book A Book B
Cash
External
Counterparty

13
Transaction Type- Agency

Seller We are Buyer

STO
Trading Book
Transfer

Securities Trading
Trade Trading
1 Book A Book B
Cash
External Client
Counterparty

14
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 for

operational purpose resides within Middle office/ trade
support area or the settlement dept.

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

15
Gross Cash Value Calculation
 GCV is derived by applying the price to the
quantity traded.
For Equity Price Types:
GCV= No. of shares * Price per share

For Bond Price Types: Bonds are traded at a

percentage price of relevant to Currency and
face value of the bond. Face value * Price
100

 Clean Price = quoted price

 Dirty price = clean price +
accrued interest 16
Two set of information required to calculate
NSV:
 The Gross Cash Value (GSV)
 Any additional Trade amounts

Additional Trade Amounts can be categorised

as follows :
1. Compulsory trade amounts
2. Optional trade amounts
3. Internal trade amounts

17
Compulsory Trade Amounts
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 fixed
GBP 0.25 is payable on purchase and sales over GBP 10,000.00
Japan: Registrars may charge a fee for registration of Securities

18
Accrued Interest

 Cash Value of Accrued Interest:

Face Value * Coupon Rate %* No. of Days
Annual Divisor

19
Optional Trade Amounts
Choose to charge, that will be added to
GCV.
• Administration fee
• Commission
Depends on monetary value
Location of the market
Availability of the security.
 Commission is negotiable.
 It is % of Gross Cash value.
 It is used to make Profit.

20
Internal Trade Amounts

Cash value that is not charged to Counterparty.

 Sales Credit
 Processing instruction with Custodian

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

21
 Maintaining Static Data
 It is of great importance to maintain
accurate static data for:-
 Counterparties
 Instruments
 Firm Accounts
 Instructions

 Incorrect static data may lead to delayed

or unmatched transactions and
dissatisfied customers

22
 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

23
 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.

24
Trade Execution
 Order s are executed either in:
1. Quote Driven market
2. Order Driven market
 Via Telephone, face-face, computerized exchange

Trade capture
 Trade executed to be recorded.
1. Update the trading position
2. Update the Average price of the current trading
position.

25
Trade Capture in Front Office
 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

26
Why Trade Capture – MO & BO
System
 Failure of Trade to arrive in Middle office & Back
office system.
 Validation of trade with static data items.
 Finding Exceptions.
 Position update in Settlement System

To avoid the above issue: Trade- by- Trade

Reconciliation is conducted.

27
Trade Enrichment

28
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 the

information 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.

29
Trade Enrichment Components

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.

30
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 Zero
Coupon Bonds.
3. Counterparty Type:
 Sales credits are normally calculated on trades with Institutional
Clients, but not on trades with other STO’s.

31
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

32
33
Trade Validation
 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 current
market price is used.
 Step 3a: If validation rules are passed, the trade is
processed for trade agreement and reporting.
 Step 3b: if validation fails, trade will be routed for
“exception” handling.
 Step 4: Trade will be forwarded to appropriate
person or group.
 Step 5: Trade is authorized having been
investigated and modified to correct.
 Step 6: Trade is updated and then release for34
Trade Agreement
• Act of gaining the agreement of the trade details
with the counterparty.

Trade agreement can be achieved through:

 Issuance of outgoing trade confirmations to the
counterparty.
 Receipt of incoming trade confirmations to the
counterparty.
 Trade Matching
 Trade Affirmation

35
36
Trade Confirmation Transmission
Methods
• Counterparty has preference for the medium by
which trade confirmation is received.
• Information is held as part of the static data for the
specific counterparty.
Types of media:
• Fax : Handwritten or typed message
• Telex : Printed message
• SWIFT: Society for Worldwide Interbank Financial
Telecommunication.
• E-mail: Electronic message

37
 EXCHANGING SECURTIES AND CASH
 Local Agents are referred as Custodians.
 Custodian is responsible for exchanging securities &
cash as a result of buying and selling by the
Exchange.
 Exchange of securities and Buyer
Seller
cash is known as
Market
Settlement. Place
 Is there any risk involved ?
Settlement
 Efficient and Risk free
method of Settlement is
Trade
Delivery Vs Payment.
Exchange of
Assets

38
Role of “The Custodian”

39
Selection of Custodian Details

Selection of relevant custodian details for both the

trading company and counterparty is affected by:

1. Trading Company
2. Transaction Type : Securities and Forex
3. Security Group:
Eg: US equities to settle in New York custodian
New Zealand Govt bonds will settle at
Wellington custodian

40
 Settlement Cycle
 International securities transactions
traded normally settle T+3
 UK equities T+3 (What is India?)
 Trades in new issues and domestic
markets may have a different settlement
life cycle
 Trades that do not settle on settlement
date are ‘fails’

41
 Trade Settlement Methods

 Delivery versus Payment

 Free of Payment
 Physical delivery
 Cross Border Settlement

42
 Settlement Instruction
Statuses
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

43
 Settlement Failure
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

44
 Trade Settlement Types
Movement of securities and cash can occur in different
ways:

 Full Settlement: no outstanding cash or securities.

 Partial Settlement: partial delivery, partial settlement.
There would be change in settlement instructions to
process Partial settlement.
 Securities Only Settlement.
 Cash Only Settlement.
 Cross- Currency Securities Settlement.

45
Trade Settlement
Internally
 Pre- settlement Trade record
 Post- Settlement Trade record
 Settlement write-off.
 Unsettling a settled trade Internally

46
Reconciliation

 Nostro Reconciliation
 Depot Reconciliation
 Intercompany Reconciliation
 Inter-account Reconciliation

47
Objective and
Initiatives
The securities industry recognises the need for
continued evolution, in order to address the
objectives of:

 Minimising Risk
 Minimising Operational Cost
 Servicing Clients
 Managing Increasing Trading volumes and
 Maximising Internal efficiency- static data.

48
 Conclusions

 With ever growing volumes and the

desire to reduce the settlement cycle
comes the need for...
 Higher levels of STP
 Higher levels of operating efficiency
 Well qualified operations personnel.

49
Questions???

50
THANK
YOU
sheetal.raj@hcl.com
51