The Securities Trade Lifecycle

Beth_Chan

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Definitive Trade Lifecycle Guide

Expose to securities operations, be able to understand and describe:

all components of the Trade Lifecycle
the lifecycle processing sequence and processing impact
what causes (and prevents) Straight Through Processing
primary risks and typical mitigating controls
market-wide terms used in securities trade processing

The securities trade lifecycle

Trade lifecycle includes:

both internal & external management of trades

both outgoing & incoming information

What's a trade?

Transaction type

Buy/Sell
Repo
Securities, Lending and Borrowing
Movement of securities, particularly bonds, collateral

What is trade execution?

How are trades executed?

What information do market makers/traders need in order to trade?

How is trade execution initiated?

Failed Settlement

What is failed settlement?

A securities trade in which the associated securities and/or cash have not been exchanged with the counterparty on value date.

Settlement

What is trade settlement?

The passing of securities and cash between buyer and seller externally, by the film's CSD/custodian.

It's a crucial part of any securities transaction.

Here's a breakdown of how it works:

Trade Execution: The buyer and seller agree on the terms of the trade, including the price and quantity of the securities.
Confirmation: Both parties confirm the trade details and agree on the settlement date.
Clearing: The trade is sent to a clearinghouse, which acts as a central counterparty to guarantee the transaction.
Settlement: The CSD/custodian facilitates the transfer of securities and cash between the buyer and seller. This typically involves:
- Delivery of Securities: The seller's CSD/custodian delivers the securities to the buyer's CSD/custodian.
- Payment of Cash: The buyer's CSD/custodian transfers the purchase price to the seller's CSD/custodian.
Confirmation of Settlement: Both parties receive confirmation that the settlement has been completed.

Key Points:

CSD/Custodian Role: The CSD/custodian acts as an intermediary, holding the securities and cash on behalf of the buyer and seller. They ensure that the settlement process is completed smoothly and efficiently.
Importance of Settlement: Settlement is essential for ensuring that both parties to a trade receive what they are entitled to. It also helps to reduce the risk of default.
Types of Settlement: There are different types of settlement, including:
- T+2 Settlement: This is the most common type of settlement, where the trade is settled two business days after the trade date.
- T+1 Settlement: Some markets have moved to T+1 settlement, where the trade is settled one business day after the trade date.
- Real-Time Settlement: In some markets, trades can be settled in real time, which means that the transfer of securities and cash occurs immediately after the trade is executed.

Example:

Imagine you buy 100 shares of Apple stock from another investor. The trade is executed and confirmed, and the settlement date is set for T+2. On the settlement date, your CSD/custodian will receive the 100 shares of Apple stock from the seller's CSD/custodian, and your CSD/custodian will transfer the purchase price to the seller's CSD/custodian.

Note: The specific details of the settlement process may vary depending on the market and the type of securities being traded.

What are the different forms of trade settlement?

delivery versus payment (DvP)

riskless - simultaneous exchange of securities and cash

交割付款（Delivery Versus Payment，DVP） 是一种证券市场结算方式，它确保只有在付款完成后才会进行证券的交割。

DVP 的运作方式：

买方义务：买方必须在收到所购证券之前或同时履行其付款义务。
同步交割：只有在买方付款后，其银行才会将证券交付给买方。

free of payment (FoP) - without risk

also known as ‘upon receipt’

riskless

from the seller’s perspective…

seller does not part with securities until the buyer’s cash has been received

from the buyer’s perspective…

buyer does not part with cash until the seller’s securities have been received

free of payment (FoP) - with risk

risk

seller parts with securities prior to receipt of cash from buyer

buyer parts with cash prior to receipt of securities from seller

to go “on-risk” settlement departments should...

utilize procedures to gain internal approval

免付 (FoP) 是一种证券交易结算方式，其中证券的交付或接收与相应的资金转移无关。1 这意味着证券在没有货币交换的情况下进行转移。 FoP 交易通常用于证券市场，例如在账户之间转移证券而无需现金交易。

FoP 交易通常用于参与方之间存在既有关系并相互信任的情况。这是因为 FoP 交易比交付对价 (DVP) 交易具有更高的交付风险，在 DVP 交易中，资金和证券的交付同时进行。

以下是一些可能使用 FoP 交易的情况示例：

在同一机构内账户之间转移证券：证券公司可能会使用 FoP 在同一客户持有的账户之间转移证券。
作为礼物或遗产的一部分转移证券：个人可能会使用 FoP 将证券转移给受益人作为礼物或遗产的一部分。
作为合并或收购的一部分转移证券：参与合并或收购的公司可能会使用 FoP 将证券作为交易的一部分进行转移。

需要注意的是，FoP 交易并不总是合适的。它们只应在参与方之间具有高度信任和了解所涉及风险的情况下使用

How are trades settled?

instructions are matched prior to value date

corrective action on unmatched trades is vital

on value date

CSD operates its settlement cycle

seller must have securities to deliver
buyer must have cash to pay

when settlement occurs

buyer will be credited with securities - debited with cash
seller will be debited with securities - credited with cash

当交易最终完成时：

买方的账户会增加（贷记）所购买的证券，同时减少（借记）支付的现金。
卖方的账户会减少（借记）所出售的证券，同时增加（贷记）收到的现金。

这体现了交易双方在结算过程中，证券和现金的转移以及账户的相应变化。

Is it possible to settle trades against different cash values between buyer & seller?

In certain CSDs, it’s possible to settle trades where cash values within a certain tolerance, e.g. USD25 at Euroclear settling against the seller’s cash figure.

Reflecting Settlement

Do trades within internal books & records require updating as a result of settlement externally?

Yes – in order to bring internal records in-line with outside world

extremely important aspect of trade processing…

‘clean-up’

accuracy of resultant B&R will be proven through reconciliation

How is this achieved?

Reflecting individual settlements advised by custodians, based upon settlement advices received and matching via unique trade reference number. Within internal B&R, the act of trade capture results in a trade record being created, initially 'open', and exposes exposure with a counterparty.