· Order Placement (Front Office): When investors want to buy or sell a security, he approaches his broker who in turn places an order on behalf of his client.
· Trade Initiation – In Trade initiation process, Trade will be initiated. Trader will discuss, negotiate and have an agreement with the counter party on the notional amount, risk premium rate, in case of IRS what can be fixed and floating rate of interest, Libor percentage, legality of contract, schedule payment, term of the contract, maturity date.
· Trade Execution (Front Office): When a broker places the order in the market for his client and the order matches, a trade is said to be executed. It is a process of order matching. At this stage a trade ticket is created. If the Trade is executed in OTC market then Term Sheet will be generated.
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Trade Capture / Booking (Front Office): It is the process of booking the trade into the systems within a financial organization. Capturing the Trade in Front office, Risk Management system and add economic information of Trade. – Side, Qty, Price, ISIN, Counter Party, Trade date, Effective date, Valuation date, Maturity date, Payment date
o This Trade information which we have captured in front office is also used by Middle office and Settlement team
o Checking of Position & P/L - The MO and/or financial control will check the trader’s position and profit and loss to ensure that it is completely and accurately recorded.
· Trade Capture / Booking (Middle Office): Capturing the economic details of the trade by the middle office department. – When batch process runs, the information which are capture in front office will automatically update in Risk Management, middle office system and settlement system.
· Trade Enrichment (Middle Office): It is a process where additional details of the trade are captured. Trade is enriched with additional information (economic and non economic details). Non economic details like SSI, iBan, BIC, Instrument Identifier, address, day count conventions, exchange etc…
· Trade Allocation: Allocation of Trades Trade allocation refers to the process of allocating / splitting the total quantity across client accounts or portfolios. A fund manages several portfolios. Often, one trade is executed and allocated to various portfolios.
· Trade Verification (Middle Office): When details of the trade processed is verified.
o Aimed at validating and ensuring that the basic details of a trade are consistent and no obvious errors have been made
o Once captured, a trade is compared to credit and trading limits and enriched with data not held by trader before being approved for further processing
· Trade Validation/Amendment (Middle Office): Trade validation provides verified data that can speed-up trade transactions. If the data stored is incorrect, it’s corrected and validated.
o During the processing of trades it may also be necessary to cancel or amend trades. The details that may require amendment include:
o Economic Details like Direction of trade (Buy or sell) , Quantity , Price and commission These types of changes must always be made by the front office in their systems. The changes will then flown in to the middle office and back office systems
o Non Economic Details These include items such as SSIs or moving share allocations between accounts. These may be done on instruction of the client without reference to the front office.
· Position / P & L Control – Middle Office
o A P&L report shows the daily profit or loss for each trading book within each product line
o P&L is required every day when the trading day begins
o The P&L ensures that the trader is working from the most accurate position possible.
· Pre Confirmation / Agree on SSIs
o Pre confirmation aims to ensure that we agree settlement amounts with counterparty – if deal is unaffirmed / amount is large / counterparty is sensitive
o Minimizes risk of amounts being paid out on invalid trades / amounts going to wrong counterparties
o Agree (typically verbally) on key economics and SSIs directly with the counterparty.
· Trade Agreement (Middle Office): A trade agreement is where counter party in a trade agrees accept the details of the trade.
o Trade Affirmation: The trade details are affirmed with counter party. It is verbal affirmation. Here the bank comparing the counter parties confirmation with its own.
Trade Confirmation: The trade details are confirmed between the counter parties. It is the transmission by swift, fax or mail or the details of the trade to the counterparty
Note - Significance of Affirmation
o The investment bank may require the trade to be affirmed in most cases particularly if the value of the payment is high.
o The bank may require that the trade is affirmed or matched prior to settlement.
o This requires that the details of the settlement are agreed directly with the client.
o The funds movement policy of most banks require trades to be affirmed before settlement This matching will include the following:
§ Direction of the payment
§ Currency
§ Amount
§ Value Date
§ Settlement instructions: the account where payment will be made to or should be received into.
· Transaction reporting to regulators - Reporting the trade to the regulators. Regulators required this information to know
· Fraudulent trade activities like Insider Trading, Circular Trading
· FII limit check
· After Trade Allocation the trade details are changed so Investment bank has to report the actual owner / investor of transaction to the regulators.
· Pre Settlement (Middle Office): At this stage the middle office department checks for collateral required or securities needed before the trade is settled.
· Settlement (Middle Office): Trade is settled between counter parties at this stage. The exchange of securities takes place at this stage. Trade may fail at this stage.
· Post Settlement (Back Office): Reconciliation of data and NAV calculation is done at this stage.
o Nostro Reconciliation
o Depot Reconciliation
o Failed Trade Management
o Interest Claims
o Brokerage Control
Corporate actions. https://www.youtube.com/watch?v=V8wKtp4aeQQ&t=2195s
Private Equity-03 https://youtu.be/Wip9pwV7fZU
Derivatives https://youtu.be/iV2p9a-TUFU
Cash Recon https://youtu.be/F6H-wgwuDa8
Cash Dividend https://youtu.be/F6H-wgwuDa8
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