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Trade Execution & Immediate Post-Trade Events

Execution of Trade: When both the parties agree to the details of the trade and are willing to enter into the deal, the trade gets executed.

Confirmation: The bank would draft an inception document capturing all the trade details and send it to the counterparty to get it confirmed.

The counterparty will check the details of the trade and sign it back confirming the trade on its behalf. The communication of confirmation can be through SWIFT, Telex, Fax, or through other similar medium of financial information exchange.

Notional

Maturity

Fixed Rate

Floating Rate

Trading Book

Allocation of Trade: Some trades have to be allocated to various sub entities. This is called allocation of trade and is done for flexibility of Profit & Loss Booking.

Creation of Standard Identifier: Every trade will be stored with the help of a unique Trade ID which is used to identify the trade.

Post-Trade Changes

Amendment: The trade can be amended by the consent of both the parties. The amendment can be done in terms of the economics of the trade. If a trade is being booked incorrectly, then the amendments can be done to the booked trade with the agreed changes and it can be re-booked.

Counterparty Changes:

Assignment / Novation: Novation can be explained by an example. Suppose A and B has entered into a trade, and then C wants to enter and take A's position, or A wants to exit and let C take its position, then whoever is at an advantageous position will receive some novation fee. The most important thing is there should be consent from B for C to come in, through a Consent Letter, and B is called the remaining party. The assignment of the new counterparty can be done by the bank or the new counterparty can be assigned by the counterparty himself.

Give Ups: In a Give up Trade, the client will execute a transaction at a price supplied by an executing broker but then faces the prime broker as the counterparty. The prime broker mirrors the transaction with the executing broker as the counterparty and effectively intermediates between the two.

Partial Termination: A trade is partially terminated when there is a change in the notional of the trade and it is not pre-fixed according to the agreement.

Full Termination: This indicates the full termination of the deal before the maturity of the trade. This may or may not entail a termination fee.

Normal Termination: A trade is normally terminated when it gets matured.

Servicing Events

Rate Fixing: The Floating Rate has to be fixed every period for the cash flow settlement of the floating rate leg. The fixing rule can be defined and it may differ on a trade to trade basis. The Floating Rate may be fixed in advance or at the end of the period according to the fixing rule set for the trade.

Payment:

Cash Flow Settlement: Every settlement term, there will be cash flow that the entity will pay and receive. The cash flow will happen according to the standard settlement instructions. In case of the Interest Rate Swap, it will be the Pay Flow and Receive Flow.

Fee: A trade may have scheduled and non-scheduled fee event. A payment of brokerage or option premium might be booked as a fee for the records.

Revaluation: The trade can be revalued at intermediate stage according to the market interest rates at that point of time. That is, the future cash flows are discounted to find out the present value and then the NPV is calculated to find out the position of the entity on that particular trade. This is done for accounting purpose.

Conclusion

The entire Trade Life Cycle is a labyrinth of complex functions where the trade passes through a stream of different events. There is a lot of manual intervention in all these events and this increases the time bucket for processing and settlement of the various functions. The answer to this is STP (Straight through Processing), where the transactions can be conducted electronically without the need of re-keying or manual intervention. The market today is definitely moving towards such a solution.

Concluded.

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