TCS Confidential15 May 2012

Trading life cycle

Shilpa Billur

shilpa.billur@tcs.com

TCS Business Domain Academy

Financial System The Big Picture

Savings Deficit Units

(Corporate Sectors)Banks and Financial Institutions:

Central Bank,Mutual funds,

Insurance,Pension Funds,

Development Banks,NBFC,

Commercial Banks(Public, Private &

Foreign Banks),Co-operative banks,

Investment BanksFunds Transfer

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Savings Surplus Units

(households,

consumers)

Financial Intermediaries

Capital Markets - Primary, Secondary

Debt Markets, Money Markets

Funds Transfer

Funds Transfer

Financial System An Interwoven Web?

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The financial system helps determine both the cost and volume of credit

Savings Function

Liquidity Function

Payment Function

Risk Function

Policy Function

Functions of a Financial System

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Policy Function

GOI

Ministry of Finance

RBISEBIRegistrar of

Companies

GOI

Dept of Co. Affairs

Structure of Indian Financial System

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Depositories Companies

Broker

Dealers

Clearing

Corporations

Stock

Exchanges

Mutual

FundsBanks

Merchant

Bankers

Registrar &

Transfer

Agents

Primary

Dealers

Depository

Participants

Shares and Securities

What is a Share ?

A share is exactly what it says it is

A share of business

Share is a share in share capital of a company

What is a Security?

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What is a Security?

Securities cover wider range of instruments and

includes share, debentures, bonds

Security - different meanings - physical, financial,

data etc.

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What is a trade?

A legal contract between two counterparties. A seller

and a buyer.

The SELLER must deliver the commodity he has sold to

the buyer.

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The BUYER must pay the agreed purchase price on the

agreed value date.

Why trade?

Speculate

Profit from price move or increase in value of the asset.

Accumulate

Benefit from dividend on shares and interest on bonds.

To reduce risk. (Hedging)

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Securities Trading Key players

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Key Players

Company/ Issuer - The corporate entity that issues securities, which are traded

on the stock exchange e.g. Reliance Industries Ltd.., Proctor & Gamble, IBM.

One company may have its securities listed on many exchanges

Investor - An individual or a company which buys and sells securities with an

investment objective. An individual , a company, a corporate entity, or a group

of individuals who buy and sell securities. An individual investor could be a retail

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client, and institutional investors could be an Investment Manager, Mutual

Fund, Bank, Companies, that invest in securities either on behalf of their clients

or on their own account e.g. UTI (mutual fund), Axa Investment Managers

(Investment Manager).

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Exchanges

A platform for the buyer and the seller to trade in the securities e.g.

New York Stock Exchange formed in 1792

London Stock Exchange, NASDAQ, Chicago Mercantile Exchange,

Chicago Board Of Trade.

In India - NSE, BSE

Performs various roles such as:

Admission of securities for trading - listing

Admission of members who can trade in the securities

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Admission of members who can trade in the securities

Defining market segments like Equity / Debt / Derivative Market segment

Defining market indices like Sensex, Dow Jones, Nifty

Defining price range for trading

Monitoring the trading activities - surveillance on day to day basis.

Regulating the activities of the members of the exchange.

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Key players Investment manager- The agency which acts on behalf of its clients, and buys or sells

securities through brokers, on various stock exchanges e.g. Alliance Capital

Management. Also provides value added services like portfolio management to its clients

May operate in various instruments, markets regions of the world May have an identified

set of brokers and custodians through which it deals.

Brokers/Dealers - A member of a given stock exchange, authorised to trade only on that

exchange. Can be a member of multiple exchanges at a time. Can trade on multiple

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exchanges at a time. Can be an individual or a corporate entity like Merrill Lynch, MSDW.

Only members can trade on the exchange - investors cannot trade directly If a member

gives both buy and sell quotes for a given security, he is called a market maker in that

security. If he deals on his own account, he is called dealers Has final obligation to

honour the trades done by him on the exchange.

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Key Players

Custodian

The agency which keeps custody of physical and electronic holdings on behalf of their

clients (investors).e.g. HSBC, ABN AMRO Bank.

They also provide additional services like cash management, accounting, taxation,

reporting and effecting corporate actions on the clients holdings.

They also execute settlement instructions received from the client or clients broker or

investment manager.

They may operate across different countries and act as Global Custodians.

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They may operate across different countries and act as Global Custodians.

As global custodians, they act through central security depositories, International

central security depositories and local agents.

As Local Custodian or Local Agent they represent the global custodians in the domestic

market.

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Clearing Corporation

The agency which keeps track of buy and sell trades done by the members e.g.

National Securities Clearing Corporation (NSCCL)

It calculates the obligations for the member, for a given trading period

May also impose and collect margins on behalf of the exchange on outstanding

positions of the members

Ensures the settlement of the trades done on the stock exchange

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May act as a clearing and settlement body for one or more stock exchanges

May also act as Central Counterparties in case obligations are netted.

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Major Functions of a Typical Securities Firm

Front Office Middle Office Back Office

CustomerInteractions

Trade Capture, Market Data

Research & Analytics

Managing Suppliers, Counterparties

ManagingRisk

ManagingCustomer Support

Trade Verification

Trade & Payment Confirmations

Rate Resets & Fixing

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& Analytics

Market Making

Customer Support

Trading P&L

PositionKeeping

& Fixing

Clearance & Settlement

Reconciliation

Compliance & Reporting

Accounting Links

Reconciliation

Overview of the Indian Stock Market

BSE set up in 1875 in Bombay under a Banyan Tree situated at what is today

called DALAL STREET.

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OTCEI - Over The Counter Exchange of India was established in 1992 to meet

the needs of smaller companies. Is the first Screen Based Trading System in

India.

NSE - National Stock Exchange of India - 1993 which popularized the Screen

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Based Trading through V Sat based Network of Computer Terminals.

NSE and BSE contribute more than 70% business in the Indian Market.

National Securities Depository Limited (NSDL) and Central Depository for

Securities Limited (CDSL) are two Depositories.

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Life cycle of an Institutional trade

Investment Decision

Order

Indication

Order

Management

Clearing &

Settlement

Reconciliation

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Trade

ConfirmationTrade Execution

Management

Trade Allocation

Settlement

Stages that a trade goes through in its lifetime

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Workflow through out the life cycle of trade

Various Stages

Pre-trading

Trading

Post- trading , Pre -settlement

Settlement

Post Settlement

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Post Settlement

Buy side and Sell side Settlement of the trade

Participants various systems in Front Office, Middle Office and Back Office

need to be integrated.

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Trade Execution

Trade execution tends to operate in one of three ways

where sellers and buyers execute trades:

Trading Floor

Traditional method of trading face to face on the trading floor of a Stock

Exchange.

Computerised Exchanges

Established in the UK as part of the Big Bang in 1986. This term applied

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Established in the UK as part of the Big Bang in 1986. This term applied

to the liberalization of the London Stock Exchange (LSE) when Trading

was automated.

Telephone

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Trade Execution

Trades can be:

Quote Driven:

Market Makers quote prices via computerised screens showing the level at

which they are prepared to buy and sell with the intention of attracting

business.

Order Driven:

Orders from sellers are matched with buyers orders electronically.

Xetra (Germany) SETS (UK) SEATS (Australia)

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Xetra (Germany) SETS (UK) SEATS (Australia)

Electronic Communications Networks (ECN).

ECNs operate on an electronic basis only.

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Trade Capture

Regardless of the trade execution/origin, all trades must be recorded formally by the

market participant.

To update a trading position for a specific security within a trading book.

To update average price of the current trading position to enable the trader to calculate

trading profit or loss.

To allow trade detail to be sent through to the Back Office for trade processing and

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settlement.

As part of Market & Regulatory Reporting requirements.

To facilitate risk management.

Traders use complex trading systems to facilitate trading & position management, trade

processing is usually done via Back Office processing systems.

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Trade Validation

Trade validation occurs to check if the trade information received in the Back

office systems corresponds with the Front Office record.

Trade validation includes the checking of constituent static data information:

Examples include:

Is the security recognised on the system?

Is the Counterparty account recognised?

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Is the Counterparty account recognised?

Is the Trader allowed to trade on the trading book?

Is the trading book valid to trade security x?

Is the value date a valid settlement date in the location of settlement?

All detected errors must be investigated and corrected

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Sending and Receiving trade confirmations

Trade confirmations are generated using trade data and static information

held on the counterparty account

Confirms can be sent or received via:

Fax

Telex

SWIFT

Email (in some markets)

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Email (in some markets)

Paper

Generally trade confirmations are checked and any discrepancies are

reported back to the counterparty if:

Trade data differs (security, price, quantity, value date).

Trade is not recognised.

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Settlement Instructions

Settlement Instructions are used to communicate the

movement of securities and cash to the custodian

Trade Agreement confirms the commercial details of the

trade

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Settlement Instructions indicate the commercial details of

the trade AND the location and account details for the

cash and security movements

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Instruction Content

Settlement Instructions tell the custodian/Agent to carry out precise commands

such as:

The quantity of securities to be received or delivered.

The net settlement value to be paid or received.

From whom securities will be received.

To whom payment must be made.

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To whom payment must be made.

From whom payment will be received.

To whom securities must be delivered.

On which date to carry out these instructions

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Trade Settlement

Trade settlement is the act of exchanging securities and cash between buyer

and seller.

Value Date is the intended date of delivery and payment also known as

Contractual Settlement Date.

Actual Settlement Date applies to the actual date the exchange took place.

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Value Date and Settlement Date will be the same in the majority of trade

settlement cases.

A percentage of trades fail to settle on value date and will settle on another

date referred to as the actual settlement date

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Trade Settlement

Timely settlement of trades is an important part of the Trade

Lifecycle with implications across the following areas:

Inventory Management

Cash Management

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Settlement Risk

Cost Management

Firm Reputation

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Updating Positions

Once a trade has settled it is essential to update the firm internal books and

records to ensure:

The transaction is no longer shown as outstanding.

The securities are shown as having been received in so they can be sold

on.

The securities are shown as having been delivered out so more can be

purchased if required.

The cash is showing as having being paid out and additional cash can be

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The cash is showing as having being paid out and additional cash can be

borrowed if required.

The cash is shown as having been received in so it can be lent out to

make interest.

To retain full control of all assets and liabilities at all times. And facilitate

further trading.

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How do trades and positions get updated?

Instruction statuses are sent in by the custodian (fully settled, partially

settled, failed etc).

The system attempts to locate the relevant trade in its internal books and

records.

Once found it records the status update against the transaction.

It will also automatically update the relevant security positions and

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balances reflecting the delivery or receipts.

Manual Updates

In some cases it may be necessary to settle trade manually and a

settlements specialist may manually record the update against the trade

record.

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What are Reconciliations

Reconciliations exist to check the accuracy of the firms books and records:

Internally between systems and departments

Externally where securities and cash are held

A Reconciliation Break is a discrepancy between one record and another.

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All breaks should be investigated, accounted for and corrected to ensure

continued integrity.

Automation of reconciliation reporting facilitates timely investigation and

resolution of breaks on a daily basis.

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Why do we monitor reconciliations?

Regulatory Requirements

Requirement to show we are acting responsibly in the market place.

Trading within recommended guidelines.

Maximum security holdings in certain Firm entities.

Managing Risk

Understanding true trading position.

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Understanding true trading position.

Understanding true cash balances.

Calculating correct Corporate Action entitlement from true security holding.

Correctly reflect changes caused by Corporate Actions to the relevant

internal accounts held on all systems. (FO & BO)

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Pre-order stage of a trades life cycle

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Order stage of a trades life cycle

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Trade Execution

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Post Execution Activities in trade life cycle

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Trade confirmation activities in trade life cycle

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Trade SettlementTrade Settlement

SettlementSettlement

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Inventory Management

Cash Management

Securities Lending & Borrowing

DVP,FOP

Trade Custody

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Buying/Selling a Security

ExchangeInvestor member

Internet

Buy

Order

Sell

Order

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Investor member

Phone/Fax

Order

Routing

System

TRADE

Clearing and Settlement of a trade

ExchangeTRADE

Pay-in

BuyerBuying member

Pay-outMatching

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TRADEPay-in

Selling memberSeller

Pay-out

Typical Securities Trade Life cycle

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Pre-Trade-------1 - 2

Trade------------3 - 5

Post-Trade------6 -12

Thank You