Financial Markets Operations Management E-Book

Keith Dickinson

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Series
• Sprache: Englisch

Seitenzahl: 714

Veröffentlichungsjahr: 2015

Beschreibung

A comprehensive text on financial market operations management

Financial Market Operations Management offers anyone involved with administering, maintaining, and improving the IT systems within financial institutions a comprehensive text that covers all the essential information for managing operations. Written by Keith Dickinson—an expert on the topic—the book is comprehensive, practical, and covers the five essential areas of operations and management including participation and infrastructure, trade life cycle, asset servicing, technology, and the regulatory environment. This comprehensive guide also covers the limitations and boundaries of operational systems and focuses on their interaction with external parties including clients, counterparties, exchanges, and more.

This essential resource reviews the key aspects of operations management in detail, including an examination of the entire trade life cycle, new issue distribution of bonds and equities, securities financing, as well as corporate actions, accounting, and reconciliations. The author highlights specific operational processes and challenges and includes vital formulae, spreadsheet applications, and exhibits.

• Offers a comprehensive resource for operational staff in financial services
• Covers the key aspects of operations management
• Highlights operational processes and challenges
• Includes an instructors manual, a test bank, and a solution manual

This vital resource contains the information, processes, and illustrative examples needed for a clear understanding of financial market operations.

Leseprobe

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Financial Markets Operations Management

KEITH DICKINSON

This edition first published 2015 © 2015 Keith Dickinson

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Library of Congress Cataloging-in-Publication Data

Dickinson, Keith.     Financial markets operations management / Keith Dickinson.        pages cm     Includes index.     ISBN 978-1-118-84391-8 (cloth)   1. Investment advisors.   2. Financial services industry–Management.   3. Finance.   I. Title.     HG4621.D53 2015     332.64068–dc23

2014039881

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-84391-8 (hbk) ISBN 978-1-118-84390-1 (ebk) ISBN 978-1-118-84389-5 (ebk)

Cover Design: Wiley Cover Image Top: © iStock.com/Mani_CS2        Bottom: © agsandrew/Shutterstock

To Nicole

Contents

Preface

Note

Acknowledgements

PART ONE

CHAPTER 1 Introduction to Operations

1.1 Introduction

1.2 Organisational Structure of an Investment Company

1.3 Operations' Relationships

1.4 Other Business Functions

1.5 Summary

Notes

CHAPTER 2 Financial Instruments

2.1 Introduction

2.2 Why Do We Issue Financial Instruments?

2.3 Money Market Instruments

2.4 Debt Instruments

2.5 Equity Instruments

2.6 Derivative Instruments

2.7 Exchange-Traded Derivatives

2.8 OTC Derivatives

2.9 Summary

Notes

CHAPTER 3 Data Management

3.1 Introduction

3.2 Importance of Reference Data and Standardisation

3.3 Types of Reference Data

3.4 Data Management

3.5 Legal Entity Identification

3.6 Summary

CHAPTER 4 Market Participation

4.1 Introduction

4.2 Market Players

4.3 Market Structure

4.4 Summary

Notes

PART TWO

CHAPTER 5 Clearing Houses and CCPs

5.1 Introduction

5.2 Overview of Clearing and Settlement

5.3 The Clearing House Model

5.4 The Central Counterparty Model

5.5 Features of CCPs and Clearing Houses

5.6 Summary

Notes

CHAPTER 6 Securities Depositories (CSDs and ICSDs)

6.1 Introduction

6.2 Historical Context

6.3 Definitions

6.4 Central Securities Depositories

6.5 International Central Securities Depositories

6.6 Linkages – Exchanges, Clearing Systems and CSDs

6.7 CSD Associations

6.8 Summary

Notes

CHAPTER 7 Securities Clearing

7.1 Introduction

7.2 Generic Clearing Cycle

7.3 Trade Capture

7.4 Trade Enrichment and Validation

7.5 Regulatory Reporting

7.6 Confirmation and Affirmation

7.7 Clearing Instructions

7.8 Forecasting – Cash

7.9 Forecasting – Securities

7.10 Summary

Notes

CHAPTER 8 Settlement and Fails Management

8.1 Introduction

8.2 The Different Types of Settlement

8.3 Delivery versus Payment

8.4 Free of Payment Settlement

8.5 Settlement Fails

8.6 The Move to Shorter Settlement Cycles

8.7 Summary

Notes

CHAPTER 9 Derivatives Clearing and Settlement

9.1 Introduction

9.2 Regulatory Changes

9.3 Exchange-Traded Derivatives Contracts

9.4 Cleared OTC Derivatives Contracts

9.5 Non-Cleared OTC Derivatives Contracts

9.6 Summary

Notes

PART THREE

CHAPTER 10 Custody and the Custodians

10.1 Introduction

10.2 Custody

10.3 Holding Securities

10.4 The Custodians

10.5 Target2Securities (T2S)

10.6 Summary

Notes

CHAPTER 11 Corporate Actions

11.1 Introduction

11.2 Types of Corporate Action Event

11.3 Participation in Corporate Actions

11.4 Entitlements, Key Dates and Claims

11.5 Corporate Action Event Processing

11.6 Information Flows

11.7 Corporate Action Risks

11.8 Industry Initiatives

11.9 Corporate Governance and Proxy Voting

11.10 Withholding Tax

11.11 Impact on Other Departments

11.12 Summary

Appendix 11.1: Corporate Action Event Type Categories

Appendix 11.2: Voluntary and Mandatory Events for Equities and Bonds

Notes

CHAPTER 12 Securities Financing

12.1 Introduction

12.2 Types of Securities Financing

12.3 The Players and Their Motivations

12.4 Intermediaries

12.5 Agreements and Code of Guidance

12.6 Securities Lending Lifecycle

12.7 Repurchase Agreement Lifecycle

12.8 Collateral and Margin

12.9 Default and Close-Out Provisions

12.10 Central Counterparty (CCP) Services

12.11 Summary

Appendix 12.1: Credit Ratings – Long Term

Appendix 12.2: Delivery by Value (DBV) Class List

Appendix 12.3: Technology Vendors

Notes

PART FOUR

CHAPTER 13 Accounting for Securities

13.1 Introduction

13.2 The Accounting Equation

13.3 The Accounting Lifecycle for Securities

13.4 Gains and Losses

13.5 The Accounting Lifecycle for Derivatives

13.6 Summary

Appendix 13.1: Closing Prices for Singapore Equities (SGX)

Notes

CHAPTER 14 Reconciliation

14.1 Introduction

14.2 Importance of Reconciliation

14.3 Types of Reconciliation

14.4 Automation of Reconciliations

14.5 Summary

About the Author

Index

End User License Agreement

List of Tables

Chapter 1

TABLE 1.1

TABLE 1.2

TABLE 1.3

TABLE 1.4

TABLE 1.5

Chapter 2

TABLE 2.1

TABLE 2.2

TABLE 2.3

TABLE 2.4

TABLE 2.5

TABLE 2.6

TABLE 2.7

TABLE 2.8

TABLE 2.9

TABLE 2.10

TABLE 2.11

TABLE 2.12

TABLE 2.13

TABLE 2.14

TABLE 2.15

TABLE 2.16

TABLE 2.17

TABLE 2.18

TABLE 2.19

TABLE 2.20

TABLE 2.21

TABLE 2.22

TABLE 2.23

TABLE 2.24

TABLE 2.25

TABLE 2.26

TABLE 2.27

TABLE 2.28

TABLE 2.29

TABLE 2.30

TABLE 2.31

TABLE 2.32

TABLE 2.33

TABLE 2.34

TABLE 2.35a

TABLE 2.35b

TABLE 2.36

TABLE 2.37

TABLE 2.38

TABLE 2.39

TABLE 2.40

TABLE 2.41

TABLE 2.42

TABLE 2.43

TABLE 2.44

TABLE 2.45

TABLE 2.46

TABLE 2.47

TABLE 2.48

TABLE 2.49

TABLE 2.50

TABLE 2.51

TABLE 2.52

TABLE 2.53

TABLE 2.54

TABLE 2.55

TABLE 2.56

TABLE 2.57

Chapter 3

TABLE 3.1

TABLE 3.2

TABLE 3.3

TABLE 3.4

TABLE 3.5a

TABLE 3.5b

TABLE 3.6

TABLE 3.7

TABLE 3.8

TABLE 3.9

TABLE 3.10

TABLE 3.11

Chapter 4

TABLE 4.1

TABLE 4.2

TABLE 4.3

TABLE 4.4

TABLE 4.5

TABLE 4.6

TABLE 4.7

TABLE 4.8

TABLE 4.9

TABLE 4.10

TABLE 4.11

TABLE 4.12

TABLE 4.13

TABLE 4.14

TABLE 4.15

TABLE 4.16

TABLE 4.17

TABLE 4.18

TABLE 4.19

TABLE 4.20

TABLE 4.21

TABLE 4.22

TABLE 4.23

TABLE 4.24

Chapter 5

TABLE 5.1

TABLE 5.2

TABLE 5.3

TABLE 5.4

TABLE 5.5

TABLE 5.6

Chapter 6

TABLE 6.1

TABLE 6.2

TABLE 6.3

TABLE 6.4

TABLE 6.5

TABLE 6.6

TABLE 6.7

TABLE 6.8

TABLE 6.9

Chapter 7

TABLE 7.1

TABLE 7.2

TABLE 7.3

TABLE 7.4

TABLE 7.5

TABLE 7.6

TABLE 7.7

TABLE 7.8

TABLE 7.9

TABLE 7.10

TABLE 7.11

Chapter 8

TABLE 8.1

TABLE 8.2

TABLE 8.3

TABLE 8.4

TABLE 8.5

TABLE 8.6

TABLE 8.7

TABLE 8.8

TABLE 8.9

TABLE 8.10

TABLE 8.11

Chapter 9

TABLE 9.1

TABLE 9.2

TABLE 9.3

TABLE 9.4

TABLE 9.5

TABLE 9.6

TABLE 9.7

TABLE 9.8

TABLE 9.9

TABLE 9.10

TABLE 9.11

TABLE 9.12

TABLE 9.13

TABLE 9.14

TABLE 9.15

TABLE 9.16

TABLE 9.17

TABLE 9.18

TABLE 9.19

TABLE 9.20

TABLE 9.21

TABLE 9.22

Chapter 10

TABLE 10.1

TABLE 10.2

TABLE 10.3

TABLE 10.4

TABLE 10.5

TABLE 10.6

TABLE 10.7

TABLE 10.8

TABLE 10.9

TABLE 10.10

TABLE 10.11

TABLE 10.12

TABLE 10.13

TABLE 10.14

Chapter 11

TABLE 11.1

TABLE 11.2a

TABLE 11.2b

TABLE 11.3

TABLE 11.4

TABLE 11.5

TABLE 11.6

TABLE 11.7

TABLE 11.8

TABLE 11.9

TABLE 11.10

TABLE 11.11

TABLE 11.12

TABLE 11.13

TABLE 11.14

TABLE 11.15

TABLE 11.16

TABLE 11.17

TABLE 11.18

TABLE 11.19

TABLE 11.20

TABLE 11.21

TABLE 11.22

TABLE 11.23

TABLE 11.24

TABLE 11.25

TABLE 11.26

TABLE 11.27

TABLE 11.28

TABLE 11.29

TABLE 11.30

TABLE 11.31

TABLE 11.32

TABLE 11.33

TABLE 11.34

TABLE 11.35

TABLE 11.36

TABLE 11.37

TABLE 11.38

TABLE 11.39

TABLE 11.40

TABLE 11.41

Chapter 12

TABLE 12.1

TABLE 12.2

TABLE 12.3

TABLE 12.4

TABLE 12.5

TABLE 12.6

TABLE 12.7

TABLE 12.8

TABLE 12.9

TABLE 12.10

TABLE 12.11

TABLE 12.12

TABLE 12.13

TABLE 12.14

TABLE 12.15

TABLE 12.16

TABLE 12.17

TABLE 12.18

TABLE 12.19

TABLE 12.20

TABLE 12.21

TABLE 12.22

TABLE 12.23

TABLE 12.24

TABLE 12.25

TABLE 12.26

TABLE 12.27

TABLE 12.28

TABLE 12.29

TABLE 12.30

TABLE 12.31

TABLE 12.32

TABLE 12.33

TABLE 12.34

TABLE 12.35

Chapter 13

TABLE 13.1

TABLE 13.2

TABLE 13.3

TABLE 13.4

TABLE 13.5

TABLE 13.6

TABLE 13.7

TABLE 13.8a

TABLE 13.8b

TABLE 13.9

TABLE 13.10

TABLE 13.11

TABLE 13.12

TABLE 13.13

TABLE 13.14

TABLE 13.15

Chapter 14

TABLE 14.1

TABLE 14.2

TABLE 14.3

TABLE 14.4

TABLE 14.5

TABLE 14.6

TABLE 14.7

TABLE 14.8

TABLE 14.9

TABLE 14.10

TABLE 14.11

TABLE 14.12

TABLE 14.13

TABLE 14.14

List of Illustrations

Chapter 1

FIGURE 1.1

Investment organisation – structure

FIGURE 1.2

Investment organisation – structure

FIGURE 1.3

Investment organisation – structure

Chapter 2

FIGURE 2.1

Summary of ICMA accrued interest rules

FIGURE 2.2

Long futures contract purchased at a price of 100

FIGURE 2.3

Short futures contract purchased at a price of 100

FIGURE 2.4

Long call option

FIGURE 2.5

Short call option

FIGURE 2.6

Long put option

FIGURE 2.7

Short put option

FIGURE 2.8

Comparison of the risks of futures and options

FIGURE 2.9

IRS plumbing diagram

FIGURE 2.10

Swap Bank as agent

Chapter 3

FIGURE 3.1

Reference data – bonds

FIGURE 3.2

Reference data – equities

FIGURE 3.3

The global LEI system structure

Chapter 4

FIGURE 4.1

Borrowers, lenders and intermediaries

FIGURE 4.2

Market structure

Chapter 5

FIGURE 5.1

Clearing house model

FIGURE 5.2

Central counterparty model

Chapter 6

FIGURE 6.1

CSD participation

FIGURE 6.2

Inter-CSD links

FIGURE 6.3

Custodian bank's access to foreign CSD

FIGURE 6.4

Local CSD's access to foreign CSD

FIGURE 6.5

Direct links

FIGURE 6.6

Relayed links

FIGURE 6.7

Linkages in the USA

FIGURE 6.8

Linkages in Europe

Chapter 7

FIGURE 7.1

Trade capture

FIGURE 7.2

Trade enrichment

FIGURE 7.3

Trade reporting

FIGURE 7.4

Trade confirmation/affirmation

FIGURE 7.5

Clearing instructions

FIGURE 7.6

Cash forecasting

FIGURE 7.7

Securities forecasting

FIGURE 7.8

The completed clearing phase

FIGURE 7.9

Dealer's blotter

FIGURE 7.10

Dealing sheet

FIGURE 7.11

Trade ticket

FIGURE 7.12

Transaction ticket

FIGURE 7.13

Outgoing trade confirmation

FIGURE 7.14

Incoming trade confirmation

FIGURE 7.15

Trade affirmation/confirmation

FIGURE 7.16

Receive versus payment

FIGURE 7.17

Delivery versus payment

FIGURE 7.18

Clearing house instructions v1

FIGURE 7.19

Clearing house instructions v2

FIGURE 7.20

Clearing house matched report to T01

FIGURE 7.21

Clearing house matched report to T02

FIGURE 7.22

Cash forecasting

Chapter 8

FIGURE 8.1

Physical settlement

FIGURE 8.2

Gridlock with ABC securities transactions

FIGURE 8.3

Multilateral netting

FIGURE 8.4

Fails management (a)

FIGURE 8.5

Fails management (b)

FIGURE 8.6

Fails management (c)

FIGURE 8.7

Buy-in

FIGURE 8.8

Buy-in pass on

FIGURE 8.9

Sell-out

Chapter 9

FIGURE 9.1

Clearing before regulatory intervention

FIGURE 9.2

Clearing after regulatory intervention

FIGURE 9.3

Exchange-traded derivatives

FIGURE 9.4

Give-Up Agreements

FIGURE 9.5

Answer to margin question

FIGURE 9.6

Trade and post-trade OTCD environment

FIGURE 9.7

Central clearing of interest rate OTCDs

FIGURE 9.8

Central clearing of credit OTCDs

Chapter 10

FIGURE 10.1

Holding securities – summary

FIGURE 10.2

Local market

FIGURE 10.3

Local markets in the same region (the brokers have been removed for reasons of clarity)

FIGURE 10.4

Global custody structure: sub-custodian network

FIGURE 10.5

Institutional client appoints global custodian

FIGURE 10.6

Investment manager appoints global custodian

FIGURE 10.7

Links with the ICSDs

FIGURE 10.8

Fragmented European landscape

FIGURE 10.9

Integrated model – T2S and Target2

Chapter 11

FIGURE 11.1

Communication chains between issuer and investor

FIGURE 11.2

Cum- and ex-dividend timeline

FIGURE 11.3

Normal cum-benefit and normal ex-benefit trading

FIGURE 11.4

Communication via global custodian

FIGURE 11.5

Communication via local custodian

FIGURE 11.6

ICSD communication with depository, global custodian and fund manager

Chapter 12

FIGURE 12.1

Summary of securities financing transactions

FIGURE 12.2

Loan commencement

FIGURE 12.3

Loan completion

FIGURE 12.4

Nominal amount of bonds required

FIGURE 12.5

Repurchase agreement

FIGURE 12.6

Sell/buy-back

FIGURE 12.7

Tri-party repo

FIGURE 12.8

HIC repo

FIGURE 12.9

Initial purchase

FIGURE 12.10

Exposure on purchase date

FIGURE 12.11

Exposure on a forward date

FIGURE 12.12

Exposure after margin call

Chapter 13

FIGURE 13.1

ABC – Profit & Loss Statement

FIGURE 13.2

ABC – Balance Sheet

FIGURE 13.3

Settlement entries

FIGURE 13.4

Sale of 3,500 Jardine Cycle & Carriage shares

FIGURE 13.5

Final position of Jardine Cycle & Carriage shares

FIGURE 13.6

Bonds purchased at par

FIGURE 13.7

Bonds purchased at a premium

FIGURE 13.8

Bonds purchased at a discount

FIGURE 13.9

Transactions in Carrefour shares

FIGURE 13.10

Index futures contract

Chapter 14

FIGURE 14.1

Securities Reconciliation Report

Guide

Cover

Table of Contents

Preface

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Preface

I have been involved in Operations for over forty years as a practitioner, an executive education trainer and university lecturer. In my practitioner days, there was very little by way of reference books that addressed Operations; in addition, the Internet had yet to enter our collective consciousness. As a consequence, it was difficult for those working in Operations to find any literature that dealt with their topic.

Today, we can research any topic we choose, including Operations, by accessing the Internet, clicking through websites managed by exchanges, depositories, custodians, regulators and various trade associations. In spite of this, and with one or two notable exceptions, there is a dearth of books that enable Operations professionals to navigate the settlement and post-settlement environment for securities and derivatives.

This book, Financial Markets Operations Management, fills that information gap.

The intended audience is fourfold. Firstly, the text may be used in a teaching context as a course reader for staff already working in an operational environment. Secondly, as a reference guide for students taking a financially focused first degree or Masters course. Thirdly, for staff working in non-operational areas that are interested in what happens “after the trade has been executed”. Finally, for those who are about to enter the financial world or who simply have a passing interest in the subject, this book is for those readers.

The text covers the trade lifecycle for securities and derivatives products from trade capture, pre-settlement and settlement through to the custody of assets and asset servicing. It is divided into four parts, as follows:

Part One: An understanding of operations in the context of financial instruments, data management and the different types of organisation.

Part Two: The post-trade processing of financial instruments; trade capture, clearing and settlement.

Part Three: The post-settlement environment of safekeeping, asset servicing and asset optimisation.

Part Four: A consideration of two key controls – accounting for securities and asset reconciliation.

Chapters are broken down as follows:

Chapter 1 looks at the organisational structure of a typical investment company and at the Operations Department in particular. We consider the internal and external relationships that Operations manage.

Chapter 2 defines the main financial instruments, explains the operational features and shows the transaction calculations including accrued interest for bonds.

Chapter 3 considers the importance of data and its management.

Chapter 4 explains how the various intermediaries and market infrastructures enable lenders and borrowers to operate.

Chapter 5 starts the post-trade processing phase by looking at the clearing systems and distinguishing between clearing houses and central counterparties.

Chapter 6 continues looking at the infrastructure and in particular the securities depositories.

Chapter 7 follows the initial post-trade processes of clearing and the pre-settlement forecasting of cash and securities.

Chapter 8 describes the different types of settlement including “delivery versus payment”, the reasons why trades fail to settle and what actions can be taken to manage the fails.

Chapter 9 changes focus from securities to derivatives with a look at how exchange-traded and over-the-counter derivative products are cleared.

Chapter 10 looks at the safekeeping of securities including the use of nominee names and the relationships between the beneficial owner and the securities issuer, together with the intermediaries such as custodians and securities depositories.

Chapter 11 introduces the reader to what is considered to be the most risky area within Operations – corporate actions. This chapter looks at the complexities, processing requirements and information flows of this topic.

Chapter 12 describes the different forms of securities financing and includes user motivations and the lifecycle. Securities financing is not risk-free; this chapter addresses the risks and the ways in which these risks are mitigated.

Chapter 13 looks at the impact of securities transactions on the Profit & Loss Statement and Balance Sheet together with the transaction lifecycle from an accounting perspective.

Chapter 14 explains the importance of efficient and timely asset reconciliation and how it might be used as a predictive tool to prevent problems from occurring.

To cover the entire operational spectrum would require a text containing many hundreds, if not thousands, of pages. In order to overcome this problem I have concentrated on what I consider to be the main operational processes for securities and derivatives. Whilst I do not cover every type of equity, bond and derivative, there is sufficient detail to enable the reader to understand what happens in the engine room of the financial markets, i.e. after the trade is executed.

Therefore, I have not included regulation other than by occasional reference. We are subjected to regulation for a variety of reasons – for example, to maintain confidence in the financial system – and it is both complex and technical. Furthermore, in a global context, there are different and sometimes conflicting regulations from country to country.

I have also excluded commodities for two reasons. Firstly because in the physical world, types of commodities behave in different ways – think of the processes that enable you to pump petrol/gas into your car or electricity to light up your home. By contrast, commodities derivatives are cleared in similar ways to financial derivatives. Secondly, there is already an excellent book written by a friend and colleague, Neil Schofield.1

Finally, this book does not cover funds administration. This relates to activities that support the running of a collective investment scheme (for example, a traditional mutual fund, hedge fund, pension fund, unit trust or similar variation).

In any event, there is more than enough material within the regulatory, commodities and funds administration world for an additional three books.

Students and instructors can find additional resources at www.wiley.com.

NOTE

1

Schofield, N. C. (2007)

Commodity Derivatives: Markets and Applications

. Published by Wiley Finance (ISBN 978-0-470-01910-8).

Acknowledgements

Thanks to John Evans, FMT, who suggested the idea of writing the book, and to Colin Hill, Shelby Limited, who reviewed the first draft of the manuscript. At Wiley, I'd like to acknowledge the work of Development Editor Meg Freeborn, Acquisitions Editor Thomas Hyrkiel, Assistant Editor Jennie Kitchin, Senior Production Editor Tessa Allen and Copy-Editor Helen Heyes.