[일배우기] Trade Lifecycle on operations side

Introduction to investment in financial assets

 

> Trade Lifecycle on operations side

Trade processing is a less glamorous part in the financial field. It is a part of intrastructure side, sometimes called back/middle office to highlight its role against the front office. However, without efficient trade management, the trade would lose its point in the first place. 

A trade is not anymore handled by a seller and a buyer. Today, financial investment becomes more complicated because of complexity of underlying financial assets, different forms of buyers and sellers and tight regulation by government. To settle a trade, a comprehensive and professional process is required throughout the trade lifecycle.

 

1. Before-trade

In pre-trade step, clients and products are set up.
Client onboarding includes;
> receiving clients setup request.
> performing AML/CIP check. obtaining proper information such as customer due diligence(CDD), know your client(KYC), etc. from client/sales unit.
> Establishing the credit terms and managing legal agreements (with legal/compliance assistance)
> Registering the client into the firm system so sales could trade with the client information

Well-established client onboarding process is important as legal and regulartory requirements are fullfilled in this step. Incomplete onboarding may cause clients disatisfaction, risk and regularoty issues.  

 

2. During-trade

Once a trade is executed from the front desk, it is a turn to trade clearing from T/D to S/D.

@ Trade date: the date that the counterparties agree to trade
@ Value date: the date that the counterparties are obligated to exchange cash and securities.
    if not failed to fulfil the obligation, the value date is equal to the settlement date. the trade settlement is failed any of the counterparties is not able to deliver corresponding cash or securities. In case of failure, the prime broker can deliever the securities covering the counterparties obligation. The exchange would charge fail penalty to the failed party.
@ Settlement date: the date that the counterparites actually exchange cash and securities.

(1) On Trade Date
a. Capture the trade: A trade is captured with only basic information such as the underlying asset, trade/settlement currency, price and quantity. trade date and time are followed by the market regulation(if executed in exchange market)

b. Enrich the trade: detailed information is applied to the trade such as commission rate, securities identifiers(symbol, RIC..), counterparties confirmation method(BIC, SWIFT, etc...)

c. Validate/Confirm the trade: communication between the clients and the broker to validate the trade. if the trade is executed in the exchange, the exchange will capture the trade information by system.
 > in Korea equities, for domestic clients trade informations are reflected into the system by real-time. In contrast, for foreign clients' trade the trades are captured at lum-sum by T+1 morning as the trade validation would be proceeded overnight.

d. Report the trade to regulartoy bodies.

e. checking Settlement Instruction: to prevent failure, check settlement instructuon with related parties on agreed trasactions. 
    There are two types of settlement transaction method.
    >Free-of-Payment (FOP), regardless of that the counterparty pays the designated cash amount, securities are delivered in the settlement day.
    > Delivery-versus-Payment(DVP): securities are only delivered if payment is made. For example, for Korea equity, KSD(Korea Securities Depository) keeps the securities executed in the market and release securities to the brokers after cash received.

 

3. After trade

Ongoing position and rirks are managed for counterparty credit risk(a counterparty may fail to satisfy the obligation). Trades are reconciled, profit and loss(P&L) on the firm are managed. Regulatory reports should be completed.