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Trade Settlement

Trade settlement is a key back office process that ensures trades executed in the market are settled properly to avoid risks. It involves three main phases - pre-matching before the value date to prepare instructions, matching on the value date to check trades are settling, and addressing any failures on the next day. The settlement team works to resolve any issues like missing instructions or discrepancies in trade details, and monitors the status to see if counterparts are short on shares or cash to settle the trade. Key terms include trade date, value date, delivery versus payment, securities lending, and collateral trades that are important to understand for working in the settlement process.

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bnanduri
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148 views3 pages

Trade Settlement

Trade settlement is a key back office process that ensures trades executed in the market are settled properly to avoid risks. It involves three main phases - pre-matching before the value date to prepare instructions, matching on the value date to check trades are settling, and addressing any failures on the next day. The settlement team works to resolve any issues like missing instructions or discrepancies in trade details, and monitors the status to see if counterparts are short on shares or cash to settle the trade. Key terms include trade date, value date, delivery versus payment, securities lending, and collateral trades that are important to understand for working in the settlement process.

Uploaded by

bnanduri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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TRADE SETTLEMENT |

What do you understand by TRADE SETTLEMENT ?


It's a very common topic but I hope it will help everyone who is working in this profile or looking
to join settlement process.
Trade settlement is one of the key processes of back office operation.
So what happens if a trade fails to reach the market or trade is there in market but fails to settle as
the economic details are not matching
This exposes you to various types of risk like opportunity risk, reputational risk, and financial risk.
Hence the trade settlement team plays a vital role in a trade life cycle and is the most important
control point to avoid any risks and penalties.
Below are a few common terminologies you need to be familiar with when working in settlements
as these will be used on daily basis and will be your best friend.
Prematching
Match Fail
USEC ( you are short )
CSEC ( Counterparty short )
CP SHORT of cash
DVP trade ( Delivery verses payment )
RVP trade ( Receive verses payment)
FOP trade delivery / receipt ( Free Of Payment )
Economic Details (trade details )
TD ( trade date )
VD ( Value date )
TD / VD Mismatch ( Trade date / Value date miss match )
BUY-IN
SBL or Stock loan ( Securities lending and Borrowing )
Collateral trade
Cash collateral
Securities collateral
Repo trade ( First leg )
Repurchase trade ( Repo Second leg )
Euroclear Market
DTCC market
Euronext market
LCH - London clearing house
Now let's understand the different phases in trade settlement process.
Settlement process has three phases.
1) Pre-Matching - When trades are booked by trader or front office it will flow down to back office
system . Pre-Matching will start on TD (trade date ) and what happens or what you have to do is
below step by step.
a) On Trade Date you need to work on all unmatched trades or trades stuck in error
and make sure the instructions are out in the market.
b) For unmatched trades where you are missing CP instructions you will reach out
to the counterparty and ask them to release their instructions in the market. Once
the counterparty has instructed your trades will get matched.
c) If there is discrepancy in economic details with counterparty then below steps
will be followed
× 1) Reach out to your Middle office or (Trade support or Front office ) with
the details and check for the correct details.
× 2) If economic details are correct from our end then reach out to
counterparty asking them to match our instruction or else amend to
match as per middle office instructions.
d) All the trades should be prematched before Value Date ( VD )
2) Matched (Trade settlement ) - This is VD , on value date you need to cross check whether all
your trade which was matched during prematching is settled in market or not. If not then settle then
follow the below steps-
a) Check with your custodian what is the status .
b) Below are few status which custodian may inform you
1) Counterparty Short ( CSEC) / You are short ( USEC) of shares for
DVP/RVP/FOP trades
2) Counterparty short of cash for DVP/ You are cash in RVP
Based on the status you have to take action but one important thing which need to keep in mind is
currency cut-off. Before currency cut-off trades need to be in market and matched status to get them
settle .
3) Match Fail - This is VD+1 means next day of VD . If trade is not settled on VD then it will fail
and settlement will move to next business date.
Failed trade should settle as soon as possible otherwise you have to pay fail cost if you are
delivering share or charge cpty if receiving shares or if it was exchange trade then a Buy-in might
be executed.

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