Trade Life Cycle Presentation.pptx

The journey of a trade from Execution to settlement. Learn the fundamentals of Investment Banking

1. TRADE LIFE CYCLE By :Ankit Capoor

2. Capital Markets

3. We will learn Introduction to Trade Life Cycle Front Office Functions Middle Office Functions Back Office Functions

4. Why do we Trade ? We want our money to work for us. Speculate (Short Term) Accumulate (Long Term) Wealth Creation (Long Term)

5. COMPARISON OF ASSET CLASSES

6. Why Investment Bank? Investment bankers are typically the highest-paid workers in the finance industry—high salaries are most prevalent even among younger employees. Ocean of opportunities – Have various functions from backoffice roles to front office roles. Over 5,000 Investment banking related jobs to be created in India by 2025. Hyderabad and Bangalore are hotspot for major investment banks, recently J P Morgan Chase and Goldman Sachs have started their new offices.

7. Average Salary

8. INTRODUCTION In the financial market, “trade” means to buy and/or sell securities/financial products. To explain it further, a trade is the conversion of an order placed on the exchange which results in pay-in and pay-out of funds and securities. The trade ends with the settlement of the order placed. All the steps involved in a trade, from the point of order receipt (where relevant) and trade execution through to settlement of the trade, are commonly referred to as the ‘trade lifecycle’.

9. Common terms in trade life cycle ISIN : International Securities Identification Number SEDOL: Security Exchange Daily Official List SSI : Standard Settlement Instruction SWIFT : Society for Worldwide International Financial Telecommunication. IBAN : International Bank Account Number LIBOR : London Inter Bank Offered Rate.

10. Investment Banking Functions

11. Front Office Buyer FRONT OFFICE Trade Execution Trade Capture

12. FRONT OFFICE Trade Execution Order execution is the process of accepting and completing a buy or sell order in the market on behalf of a client. Order execution may be carried out manually or electronically, subject to the limits or conditions placed on the order by the account holder. Brokers are beholden to best execution practices that are regulated by the exchanges

13. FRONT OFFICE Trade Capture Orders are received from clients These are received by sales traders via phone these are termed as cash orders. Orders received electronically are termed are DMA or ALGO orders New orders are entered into Order Management System. This step is referred as “ Trade Capture”.

14. Front Office Order price are as follows: Limit A price is specified, meaning When buying, pay no more than the stated price When selling, accept no less than the stated price At Best At the best available price, also known as an At Market Order Stop Loss Sell if and when the market price falls to the stated price

15. MIDDLE OFFICE The Middle Office in Trade Life Cycle plays a vital role in the exception management. This is where the three important steps are done, which are:

16. MIDDLE OFFICE Trade Validation : Fundamental checks on the trade which includes Trading book Security identifier Trade date Quantity Price Commission SSI Value date

17. Middle Office Trade Enrichment: T rade Enrichment refers to an enhancement of something valuable to improve efficiency. It adds specific trade data to the basic trade detail to allow Downstream Processing. It involves selection, calculation, and attachment to trade of appropriate information which is essential to complete various required actions following  Trade components that require enhancements are related to: Trade figuration – calculating trade cash values Trade comparison requirements and validation for counterparties Selection of relevant custodian details Issuing Settlement instructions (For example, by SWIFT or fax) Reporting the trade to the regulatory authorities trade Enrichment can be effectively achieved from the static data repository, in an automated environment. Supposing any data items are absent, the trade is treated as an exception and all the processing will be aborted until the required information is added to the static data repository.

18. Middle Office Methods of trade validation The validation of trades can be done manually or electronically Manual – As there are numerous trade components to be validated only limited components can be manually validated. There is also possibility of human error and hence it is used for scanning the trades. Automatic- Most of trades are automatically validated via systems any potential difference between buyer and seller are highlighted and can be corrected before settlement.

19. Middle Office Trade Booking: Booking of trades from front office into internal systems and comparing the details in order to avoid settlement delays. Orders are received via email or electronically via FIX (financial information exchange) message. FIX has become the language of the global financial markets used extensively by buy and sell-side firms, trading platforms and even regulators to communicate trade information. This non-proprietary, free and open standard is constantly being developed to support evolving business and regulatory needs, and is used by thousands of firms every day to complete millions of transactions

20. MIDDLE OFFICE Trade Confirmation: The trade that is now actualized still needs to be confirmed. Brokers on both sides of the trade (the buyers and the sellers) will make sure their clients agree with the specifics of the trade. These details include which securities are being exchanged, at what price, and at which date the settlement will occur. It can be done in various ways depending on client requirement electronically or via pdf or excel.

21. BACK OFFICE

22. BACK OFFICE Clearing : Once the trade is in the clearing house, it’s time to calculate exactly what is needed from each side of the trade. The clearing house then informs both sides of what is needed.  It also ensures that all of the obligations are met by both sides.  The most common way to trade is T+2, in which T stands for the transaction date and 2 represents the number of days after the transaction date in which the settlement will take place. In the case of T+2, it means the settlement will take place 2 days after the transaction is made. After this a trade will flow into the final stage in this journey, the settlement phase.

23. BACK OFFICE Trade Settlement: In the securities industry, the trade settlement period refers to the time between the trade date—month, day, and year that an order is executed in the market—and the settlement date—when a trade is considered final. On the last day of the settlement period, the buyer becomes the holder of record of the security .

24. Back Office The classification of Trade settlement can be done into 3 types: Normal/ Rolling Settlement Trade-to-Trade Settlement Auction Rolling Settlement In this type of trade settlement, securities are settled on successive dates based on the settlement period in the contract and the day when the trade was executed. So, let’s take a trade contract period with T + 2 days settlement time, here if a trade is placed on Monday and another trade is placed on Tuesday, the trade on Monday will be settled on Wednesday and the trade executed on Tuesday will be settled on Thursday (successively). This is different from the account settlement method wherein the trade executed within a given period is all settled at once.

25. Back Office Settlement Failure – There are three key reasons why trades fail: (1) issues with funding and inventory of investment assets; (2) inefficient manual processes; and (3) failures of automated systems to produce accurate data and integrate with the reconciliation process. With funding and inventory issues, the buyer: May not have enough cash in the account designated for settling trades with the custodian  May not have credit line in place or an overdraft agreement with the custodian in the event of a cash or credit deficiency in the account being traded Does not have a netting agreement in place with the counterparty 

26. Back Office Trade-to-Trade Settlement In the  Asset allocation , Trade to Trade Settlement method, intraday trading in prohibited for securities falling in this segment. In this type of settlement method, the trader is required to accept the delivery of the security when bought and provide the monetary value, while selling the trader has to deliver the securities and the monetary value of the same will be provided to the trader for the securities traded. In short, shares are traded only for delivery. Auction Any trade involves at least two parties to the transaction, in the trading of financial securities, on one side we have the buyer of the security on the other side we have the seller of the financial security. The auction takes place when the selling party of the transaction or trade fails to deliver within the given period on the agreement of selling the security for the said or agreed upon monetary value of the security. It’s a kind of penalty for the investor’s carelessness while trading. In this case of failure, the broker of the selling party will try to purchase the security in a buy-in-auction market, the sum of the auction price along with the penalty and brokerage charges has to be paid by the defaulter (the selling party). The settlement of the action is done on T+3 days given the broker tries and purchases the share in the auction market on T + 2 days.

27. Back Office W hen a trade fails, the effects can range from operational costs and risks, as well as damage to reputation and relationships with counterparties. The party who fails to pay or deliver the security may be asked for compensation for the opportunity costs on the value of the deal until settlement is reached or the party who failed to pay or deliver the security may be asked to pay fines for failing to meet their trading obligations

28. BACK OFFICE Accounting and Reporting : The reconciliation stage of the trade life cycle ensures that all accounts of the trade which has taken place are consistent and accurate. Reconciliation can be performed in several ways, but it involves the act of comparing ledgers against statements from both sides of the trade. This confirms records made and avoids the possibility of fraud or inaccurate record keeping.

29. Other important divisions of Trade Life Cycle

30. D id You Know It is estimated global stock market value stands at $95 trillion. 1653 first stock exchange was established in Amsterdam. 1875 BSE was established Most expensive Indian stock INR 85,166 Most expensive stock Berkshire Hathaway – $ 4,18,402.00