Trade Lifecycle and key Datapoints

It's often been observed that, in Asset Management space enterprise-wide Transformation programs often Upstream Trade value chain is looked at as a black box until they flow into Middle office and that can well be a potential recipe for disaster as you may overlook some important aspects of Data Flows and Data Integration.

I want to talk about overall Trade lifecycle and key datapoints involved.

Key stages of Trade Lifecycle:

These are sequential processes during the lifetime of a Trade.

1.???? Order Generation

Orders can come directly from end client or generated Internally by Front Office Portfolio management teams, in line with Investment Strategy and Investment Objectives of their Fund and it’s Investment vehicle (like Mutual Fund). These orders are sent through to Order Management System where further Lifecycle kicks in.

2.???? Pre-Trade:

·?????? Client is onboarded, and relationship established.

·?????? All due diligence regarding client jurisdiction is completed.

·?????? All the legal agreements (for ex: ISDA) are put in place.

·?????? Counterparty risk is assessed.

·?????? Collateral management is initiated as applicable (Typically for derivative Trades.)

·?????? Risk of Positions (market Risk) is assessed.

3.???? Trade Execution

·?????? Client instructions and authorizations must be in place.

·?????? There can be number of drivers behind the Trade such as Cash, Liquidation of Portfolio, Rebalancing, Conversion (like Mutual Fund to ETF), diversify the Portfolio, Hedge a position.

·?????? Trades themselves can optionally have Price Limits/Thresholds and/or time limits for execution.

·?????? Work with broker for execution process.

·?????? Communicate with client upon execution.

4.???? Trade Clearing

Here verification and validation of Trade details are done by counterparties. Basically, here Trade is captured, enriched and validated by both parties. Then it is sent for matching, confirmation and allocation. CTM is one of the many popular matching platforms.

It can be thought into further steps:

·?????? Trade Capture: Initial Recording of executed trades with basic information. ex: underlying asset, currency, price, amount, quantity, trade date and so on.

·?????? Trade Enrichment: The step when additional information is enriched on a trade for subsequent stages of Trade Lifecycle. Ex: Value Date, Security Identifiers, Counterparty details and legal details.

·?????? Trade Validation: A final validation on all the Trade information. This is the opportunity to identify and correct issues before communicating to counterparty.

·?????? Trade Confirmation: In this step Trade details are verified and agreed by all participants to the Trade. For ex: for a OTC trades agreements is between two investment firms engaged in the Trade.

·?????? Trade affirmation: Trade details are verified and agreed by direct and indirect participants For ex: Investment firm involved in the Trade and it's client.

·?????? Trade Reporting: Reporting of Trade Transaction.

·?????? Preparation of settlement Instructions.

5.???? Trade Settlement:

Kicks in after Trade clearing. It is basically bringing closure to the Transaction. It is key as it involves exchange of value. It requires thorough Management, operating model and added controls. There are two types of settlement methods:

·?????? Delivery Vs Payment / DvP

DvP refers to settlement whereby securities are only delivered if payment is made and vice versa payment is made only if securities are delivered. For ex: in case of common stock both shares and Cash are exchanged same time. In this model as Money goes into Sellers' custodian account, Shares go into Buyers' custodian account.

·?????? Free of Payment / FOP

Here delivery of securities and payment happen at different times. This increases Counterparty Risk for party which has delivered first as other may default.

6.???? Risk Management

This is ongoing Position and Risk Management in its Trading Book. Few of the activities may include managing Corporate Actions, managing Counterparty Credit risk, measuring P&L, Trades from Cash Recons, measurement of Risk and Sensitivities and preparing reports for internal/external consumption.

Key Dates:

·?????? Trade Date is date which is mutually agreed for Trade to take place by counterparties.

·?????? Exchange of Securities, Cash, Currencies take place later on after Trade date. This date depends on underlying product, assets and markets. Value Date is the date when counterparties contractually mandated to do this exchange.

·?????? Settlement Date is the date when actual exchange happens.

Parties Involved:

·?????? Two counterparties in case of OTC trades, both of which can be buy-side Investment firms.

·?????? Counterparty and an Execution broker (in case of exchange traded) , who facilitate the execution on the exchanges.

·?????? Clients of respective counterparties.

·?????? Custodians: Once the Trades are matched instructions are sent to respective Custodians with whom they have Cash and Securities accounts. Custodians can have their own platforms for Trade capture, enrichment, and validation. Some may have pre-matching with executing brokers for timely settlements. (T+2 settlement). Custodians usually provide intraday and end of day updates on Trades using agreed protocol (For Ex: Swift messages). This helps everyone keep Cash and Security movements in and out of their accounts consistent.

·?Sub-custodians: Optionally can be used by custodians for getting any local markets and added skills.

So, Trade Lifecycle is very thorough process with all the involved parties before Trade, during the Trade and after the Trade happens.

I hope some of you may find this helpful for understanding overall mechanics of Trade Lifecycle.

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?@tradelifecycle @frontoffice @coun