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Securities Operations: A Guide to Trade and Position Management

Book Description

The only comprehensive account of operational risk in securities settlements

Securities Operations focuses on the settlement aspects of a securities transaction. As financial analysts make a greater effort toward quantifying and managing operational risk, they are paying more attention to securities transactions in general and to the settlement phase in particular. While describing the practical issues, this book enumerates the different "back office" related risks potentially encountered throughout the settlement. Simmons also covers more advanced topics such as derivatives, trade compensation, internal allocation of funding costs, and operational performance measurement.

Michael Simmons (London, UK) is currently Head of Business Consultancy at Wilco International, a major software systems provider to the financial markets.

Over the years, financial professionals around the world have looked to the Wiley Finance series and its wide array of bestselling books for the knowledge, insights, and techniques that are essential to success in financial markets. As the pace of change in financial markets and instruments quickens, Wiley Finance continues to respond. With critically acclaimed books by leading thinkers on value investing, risk management, asset allocation, and many other critical subjects, the Wiley Finance series provides the financial community with information they want. Written to provide professionals and individuals with the most current thinking from the best minds in the industry, it is no wonder that the Wiley Finance series is the first and last stop for financial professionals looking to increase their financial expertise.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Dedication
  5. Disclaimer
  6. Contents
  7. Foreword
  8. Introduction
    1. OBJECTIVES AND STRUCTURE OF THE BOOK
  9. Acknowledgements
  10. 1: Essential Trading and Settlement Concepts
    1. 1.1 INTRODUCTION
    2. 1.2 TERMINOLOGY
    3. 1.3 DIFFERENCES IN TERMINOLOGY
    4. 1.4 DIFFERENCES IN THE EXCHANGE OF GOODS/SECURITIES AND CASH
    5. 1.5 METHODS OF EXCHANGING SECURITIES AND CASH
    6. 1.6 REMAINING IN CONTROL
    7. 1.7 RECORDING DETAILS OF INDIVIDUAL TRADES
    8. 1.8 SUMMARY
  11. 2: The Securities Marketplace
    1. 2.1 INTRODUCTION
    2. 2.2 SECURITIES
    3. 2.3 PARTICIPANTS
    4. 2.4 REGULATORS
    5. 2.5 CUSTODIANS
    6. 2.6 OTHER PARTICIPANTS IN THE SECURITIES MARKETPLACE
    7. 2.7 GLOBALISATION
    8. 2.8 SUMMARY
  12. 3: Bringing Securities to the Marketplace
    1. 3.1 INTRODUCTION
    2. 3.2 METHODS OF ISSUING SECURITIES
    3. 3.3 BOND ISSUES VIA SYNDICATION
    4. 3.4 EQUITY ISSUES VIA IPO AND PUBLIC OFFER FOR SALE
    5. 3.5 POST THE LAUNCH OF SECURITIES
    6. 3.6 SETTLEMENT OF TRADES IN THE SECONDARY MARKET
    7. 3.7 FURTHER ISSUES OF EQUITY
    8. 3.8 SUMMARY
  13. 4: Structure of a Securities Trading Organisation
    1. 4.1 INTRODUCTION
    2. 4.2 THE GROUP OF COMPANIES
    3. 4.3 COMPANIES WITHIN A GROUP
    4. 4.4 DIVISIONS WITHIN A COMPANY
    5. 4.5 DEPARTMENTS WITHIN DIVISIONS
    6. 4.6 DEPARTMENTS INDEPENDENT OF DIVISIONS
  14. 5: Transaction Types
    1. 5.1 INTRODUCTION
    2. 5.2 SECURITIES TRANSACTION TYPES
    3. 5.3 CASH TRANSACTION TYPES
    4. 5.4 OVERVIEW OF TRANSACTION TYPES
    5. 5.5 AUTOMATION
    6. 5.6 SUMMARY
  15. 6: Security Forms
    1. 6.1 INTRODUCTION
    2. 6.2 REGISTERED SECURITIES
    3. 6.3 BEARER SECURITIES
    4. 6.4 METHODS OF TRANSFER OF REGISTERED AND BEARER SECURITIES
    5. 6.5 REGISTERED AND BEARER SECURITIES: SIMILARITIES AND DIFFERENCES
    6. 6.6 SUMMARY
  16. 7: Security Types
    1. 7.1 INTRODUCTION
    2. 7.2 EQUITIES
    3. 7.3 BONDS
    4. 7.4 GROUPING OF SECURITIES
    5. 7.5 DERIVATIVES
    6. 7.6 SUMMARY
  17. 8: Trade Cash Value Calculation
    1. 8.1 INTRODUCTION
    2. 8.2 GROSS CASH VALUE CALCULATION
    3. 8.3 ADDITIONAL TRADE AMOUNTS
    4. 8.4 NET SETTLEMENT VALUE
    5. 8.5 SUMMARY
  18. 9: Static Data
    1. 9.1 INTRODUCTION
    2. 9.2 TRADING COMPANIES
    3. 9.3 COUNTERPARTIES
    4. 9.4 TRADING BOOKS
    5. 9.5 CURRENCIES
    6. 9.6 SECURITIES
    7. 9.7 SECURITY GROUPS
    8. 9.8 TIMING OF STATIC DATA SET-UP
    9. 9.9 SOURCES OF STATIC DATA
    10. 9.10 MANAGEMENT OF STATIC DATA
    11. 9.11 SUMMARY
  19. 10: The Trade Lifecycle and Straight Through Processing
    1. 10.1 THE TRADE LIFECYCLE
    2. 10.2 STRAIGHT THROUGH PROCESSING
    3. 10.3 SUMMARY
  20. 11: Trade Execution and Capture
    1. 11.1 INTRODUCTION
    2. 11.2 ORDERS FROM INSTITUTIONAL CLIENTS
    3. 11.3 TRADE EXECUTION
    4. 11.4 TRADE CAPTURE (FRONT OFFICE)
    5. 11.5 TRADE CAPTURE (SETTLEMENT SYSTEM)
    6. 11.6 SUMMARY
  21. 12: Trade Enrichment
    1. 12.1 INTRODUCTION
    2. 12.2 TRADE ENRICHMENT COMPONENTS
    3. 12.3 DETERMINING FACTORS IN TRADE ENRICHMENT
    4. 12.4 STATIC DATA DEFAULTING
    5. 12.5 FAILURE TO APPLY STATIC DATA DEFAULTS
    6. 12.6 ENRICHMENT OF COUNTERPARTY CUSTODIAN DETAILS
    7. 12.7 SUMMARY
  22. 13: Trade Validation
    1. 13.1 INTRODUCTION
    2. 13.2 STRAIGHT THROUGH PROCESSING
    3. 13.3 FUNDAMENTAL RISKS
    4. 13.4 BASIC TRADE VALIDATION
    5. 13.5 ADDITIONAL TRADE VALIDATION
    6. 13.6 METHODS OF TRADE VALIDATION
    7. 13.7 SUMMARY
  23. 14: Trade Agreement
    1. 14.1 INTRODUCTION
    2. 14.2 REDUCING THE STO'S RISK
    3. 14.3 TRADE AGREEMENT METHODS
    4. 14.4 OUTGOING TRADE CONFIRMATIONS
    5. 14.5 INCOMING TRADE CONFIRMATIONS
    6. 14.6 TRADE MATCHING WITH STOs
    7. 14.7 TRADE AFFIRMATION WITH INSTITUTIONAL INVESTORS
    8. 14.8 SUMMARY
  24. 15: Transaction Reporting
    1. 15.1 INTRODUCTION
    2. 15.2 PURPOSE OF TRANSACTION REPORTING
    3. 15.3 TRANSACTION REPORTING METHODS
    4. 15.4 TRANSACTION COMPONENTS
    5. 15.5 ACTIONS FOLLOWING DETECTION
    6. 15.6 SUMMARY
  25. 16: Settlement Instructions
    1. 16.1 INTRODUCTION
    2. 16.2 RISKS ASSOCIATED WITH SETTLEMENT INSTRUCTIONS
    3. 16.3 MAIN SETTLEMENT INSTRUCTION TYPES
    4. 16.4 CONTENT OF SETTLEMENT INSTRUCTIONS
    5. 16.5 METHODS OF TRANSMITTING SETTLEMENT INSTRUCTIONS
    6. 16.6 FORMAT OF SETTLEMENT INSTRUCTIONS
    7. 16.7 DEADLINES FOR THE RECEIPT OF SETTLEMENT INSTRUCTIONS BY CUSTODIANS
    8. 16.8 AUTOMATIC GENERATION AND TRANSMISSION OF SETTLEMENT INSTRUCTIONS
    9. 16.9 SETTLEMENT INSTRUCTION VALIDATION
    10. 16.10 MANUALLY GENERATED SETTLEMENT INSTRUCTIONS
    11. 16.11 SAFE CUSTODY RELATED SETTLEMENT INSTRUCTIONS
    12. 16.12 SETTLEMENT INSTRUCTIONS ISSUED UNDER POWER OF ATTORNEY
    13. 16.13 MAINTAINING A LINK BETWEEN A TRADE AND ITS SETTLEMENT INSTRUCTION
    14. 16.14 SUMMARY
  26. 17: The Role of the Custodian
    1. 17.1 INTRODUCTION
    2. 17.2 SERVICES PROVIDED BY CUSTODIANS
    3. 17.3 TYPES OF CUSTODIAN
    4. 17.4 RISKS ASSOCIATED WITH THE CUSTODIAN'S ROLE
    5. 17.5 CUSTODIAN SELECTION
    6. 17.6 SETTLEMENT INSTRUCTION RELATED SERVICES
    7. 17.7 SECURITIES AND CASH HOLDINGS RELATED SERVICES
    8. 17.8 COMPARISON OF CUSTODIAN SERVICES
    9. 17.9 SUMMARY
  27. 18: Pre-Value Date Settlement Instruction Statuses
    1. 18.1 INTRODUCTION
    2. 18.2 TRADE MATCHING AND SETTLEMENT INSTRUCTION MATCHING
    3. 18.3 SETTLEMENT INSTRUCTION STATUSES (PRE-VALUE DATE)
    4. 18.4 INVESTIGATION AND RESOLUTION OF UNMATCHED AND ADVISORY STATUSES
    5. 18.5 SETTLEMENT INSTRUCTION MATCHING TOLERANCES
    6. 18.6 THE STO'S RISK
    7. 18.7 METHODS OF COMMUNICATING STATUSES FROM CUSTODIANS
    8. 18.8 UPDATING THE STO'S BOOKS AND RECORDS
    9. 18.9 SUMMARY
  28. 19: Settlement Failure
    1. 19.1 INTRODUCTION
    2. 19.2 BUYERS' AND SELLERS' FOCUS
    3. 19.3 CAUSES OF SETTLEMENT FAILURE
    4. 19.4 IMPACT OF SETTLEMENT FAILURE
    5. 19.5 METHODS OF COMMUNICATING STATUSES FROM CUSTODIANS
    6. 19.6 PREVENTION OF SETTLEMENT FAILURE
    7. 19.7 ENFORCING TRADE SETTLEMENT
    8. 19.8 SUMMARY
  29. 20: Trade Settlement
    1. 20.1 INTRODUCTION
    2. 20.2 ENABLING TRADE SETTLEMENT
    3. 20.3 TRADE SETTLEMENT METHODS
    4. 20.4 TYPES OF TRADE SETTLEMENT
    5. 20.5 SETTLEMENT NETTING
    6. 20.6 SETTLEMENT TOLERANCE
    7. 20.7 SETTLEMENT PROCESSING AT THE CUSTODIAN
    8. 20.8 RESULT OF TRADE SETTLEMENT AT THE CUSTODIAN
    9. 20.9 SUMMARY
  30. 21: Reflecting Trade Settlement Internally
    1. 21.1 INTRODUCTION
    2. 21.2 PRE-SETTLEMENT TRADE RECORD
    3. 21.3 POST-SETTLEMENT TRADE RECORD
    4. 21.4 WHAT TIMELY AND ACCURATE REFLECTION ENABLES
    5. 21.5 ACHIEVING TIMELY AND ACCURATE REFLECTION
    6. 21.6 UPDATE FAILURE
    7. 21.7 SETTLEMENT INSTRUCTIONS ISSUED UNDER POWER OF ATTORNEY
    8. 21.8 SETTLEMENT WRITE-OFF
    9. 21.9 UNSETTLING A SETTLED TRADE INTERNALLY
    10. 21.10 SUMMARY
  31. 22: Position and Trade Related Operations
  32. 23: Funding
    1. 23.1 INTRODUCTION
    2. 23.2 FUNDING CHOICES
    3. 23.3 DO NOTHING
    4. 23.4 BORROW (AND LEND) CASH UNSECURED
    5. 23.5 BORROW CASH VIA REPO
    6. 23.6 CURRENCY MOVEMENT DEADLINES
    7. 23.7 FUNDING PROJECTION
    8. 23.8 COLLATERAL MANAGEMENT AT CUSTODIANS
    9. 23.9 INTERNAL FUNDING ALLOCATION
    10. 23.10 UPDATING INTERNAL BOOKS AND RECORDS
    11. 23.11 AUTOMATION
    12. 23.12 SUMMARY
  33. 24: Securities Lending and Borrowing
    1. 24.1 INTRODUCTION
    2. 24.2 PRINCIPLES OF SECURITIES LENDING
    3. 24.3 PRINCIPLES OF SECURITIES BORROWING
    4. 24.4 METHODS OF LENDING AND BORROWING SECURITIES
    5. 24.5 UPDATING INTERNAL BOOKS AND RECORDS
    6. 24.6 SUMMARY
  34. 25: Safe Custody
    1. 25.1 INTRODUCTION
    2. 25.2 BASIC SAFE CUSTODY SERVICES
    3. 25.3 SAFE CUSTODY LEGAL AGREEMENTS
    4. 25.4 SAFEKEEPING CLIENTS' SECURITIES AND CASH
    5. 25.5 SAFE CUSTODY HOLDINGS AT EXTERNAL CUSTODIANS
    6. 25.6 SAFE CUSTODY BOOKS AND RECORDS
    7. 25.7 UPDATING HOLDINGS AS A RESULT OF CORPORATE ACTIONS
    8. 25.8 VALUING CLIENTS' SECURITIES HOLDINGS
    9. 25.9 STATEMENTS OF SECURITIES AND CASH BALANCES
    10. 25.10 SAFE CUSTODY MOVEMENT TYPES
    11. 25.11 AUTHENTICATING INSTRUCTIONS RECEIVED FROM CLIENTS
    12. 25.12 ADVANCED SAFE CUSTODY SERVICES
    13. 25.13 SERVICE CHARGES
    14. 25.14 SUMMARY
  35. 26: Corporate Actions
    1. 26.1 INTRODUCTION
    2. 26.2 BENEFITS
    3. 26.3 REORGANISATIONS
    4. 26.4 MULTIFACETED ACTIONS
    5. 26.5 GENERAL (RELEVANT TO ALL CORPORATE ACTIONS)
    6. 26.6 SUMMARY
  36. 27: Reconciliation
    1. 27.1 INTRODUCTION
    2. 27.2 OVERVIEW OF RECONCILIATION
    3. 27.3 RECONCILIATION TERMINOLOGY
    4. 27.4 TYPES OF RECONCILIATION
    5. 27.5 METHODS OF RECONCILIATION
    6. 27.6 FREQUENCY OF RECONCILIATION
    7. 27.7 EXTERNAL MOVEMENTS AFFECTING POSITIONS
    8. 27.8 MANUAL VERSUS AUTOMATED RECONCILIATION
    9. 27.9 INDEPENDENCE OF THE RECONCILIATION FUNCTION
    10. 27.10 BENEFITS DERIVED FROM RECONCILIATION
    11. 27.11 SUMMARY
  37. 28: Accounting
    1. 28.1 INTRODUCTION
    2. 28.2 GENERIC ACCOUNTING PRINCIPLES
    3. 28.3 ACCOUNTING FOR SECURITIES TRADES AND POSITIONS
    4. 28.4 ACCOUNTING ENTRY LIFECYCLE (1)
    5. 28.5 ACCOUNTING ENTRY LIFECYCLE (2)
    6. 28.6 MARKING TO MARKET
    7. 28.7 P&L CALCULATION CONVENTIONS
    8. 28.8 REALISED P&L
    9. 28.9 UNREALISED P&L
    10. 28.10 AUTOMATION OF ACCOUNTING ENTRIES
    11. 28.11 SUMMARY
  38. 29: Objectives and Initiatives
    1. 29.1 TRADE PROCESSING RELATED OBJECTIVES
    2. 29.2 INITIATIVES IN PURSUIT OF TRADE PROCESSING OBJECTIVES
    3. 29.3 CORPORATE ACTIONS RELATED OBJECTIVES
    4. 29.4 INITIATIVES IN PURSUIT OF CORPORATE ACTIONS OBJECTIVES
    5. 29.5 WORKFLOW
    6. 29.6 OUTSOURCING
    7. 29.7 SUMMARY
  39. Glossary of Terms
  40. Recommended Reading
  41. Index