Chapter 5: The Role of Technology in the Pre-Settlement Phase Flashcards
what is reference data?
data used for classification purposes across an
entire organisation
why is data accuracy important?
no longer βjustβ a component of data quality. It is quite literally the most important characteristic that makes data usable and purposeful.
what is accurate reference data needed for?
- calculate trade amounts, interest, commissions, fees and taxes accurately
- enrich trades with accurate information about intended value dates, settlement agents and account codes at the settlement agents
what is a data repository?
storage space for researchers to deposit data sets associated with their research. take in data from reliable external sources (such as Bloomberg or Refinitiv), as well as data that has been
updated manually internally, and then feed this to all the
other systems in the configuration
what are the advantages of RDRs?
Ensures consistency
fed from consistent and reliable external sources
maintained by a dedicated data management team that has expertise
what are the disadvantages of RDRs?
Complex and costly to maintain
All other systems in the configuration will also need to be enhanced to integrate with the RDR
team may be costly to recruit and maintain
what is instrument reference information?
Reference data about financial instruments
what instrument reference information needs to be maintained?
- Trading Markets and Market Rules
- Unique Instrument Identifiers
- Price Calculation Methods
- Interest Details and Accrued Interest
Calculation Methods
what are market rules?
- Default settlement date
- Fees and charges
- trade and settlement currency
- Each instrument needs to have a market code
what is a Unique Instrument Identifiers?
a code that can be used to identify a specific financial instrument
what is the formula for calculating principal amount?
π·ππππππππ ππππππ = ππππππππ ππππ
ππ
Γ πππππ Γ
(πππππ ππππππππππ/πππππ π
πππππr)
what is the price multiplier?
a factor that adjusts the price of a security to reflect its value in terms of another currency or asset
what is the price divisor?
a factor that adjusts the price of a security to reflect changes such as stock splits or dividends
what is the information needed to calculate interest?
- The date from which interest becomes payable (accrual date)
- The date that the borrower will make the next interest payment (coupon date)
- The date when interest ceases to become payable and the capital returned (maturity date)
- The rate of interest that will be paid
what is counterparty reference information?
the information that identifies and describes the entity on the other side of a financial transaction
what are the 4 types of external identifiers?
- Business Identifier Code (BIC) for professional trade parties,
- UK National Insurance Number for tax-sheltered investments,
- International Bank Account Number (IBAN) for bank and depot accounts in Europe, and
- Legal Entity Identifier (LEI) for non-natural persons
what other party information does the firm need to keep a record of?
Standing Settlement Instructions (SSIs) (market participantβs default instructions for the payment and delivery of securities. They help to reduce settlement risk and improve automation)
what is external reference information?
information that is not directly related to the firm itself or its trading counterparties but is still important for conducting business operations
what are the problems that can arise due to inaccurate ref data?
failed trades, unmatched instructions, and incorrect profits and interest income
what are client/counterparty agreements?
agreements between a firm and its clients. βCounterparty agreementsβ are agreements between fellow professionals
what industry standards can counterparty agreements be based on?
industry standards and protocols that are widely accepted and used by financial firms e.g., ISDA (OTC derivatives), GMRA (bonds)
what is a durable medium (client agreements)?
client must agree to it in writing on paper or another
durable medium (DVD, CD, Hard Drive). can store information for a long time and reproduce it unchanged
what is the usual trade agreement process?
confirmation, affirmation and allocation
how does the trade agreement process change when dealing with retail investors?
the sell-side firm typically sends a trade confirmation, but the investor does not normally respond unless there is a problem
what is a mutual exchange of confirmations?
method of trade agreement where each party sends a confirmation note to the other party with their trade details. Both parties have to check that their trade details match with the other partyβs confirmation note
what is the role of matching engines?
computer programs that automate the process of confirmation matching between trading parties. provided by exchanges and clearing houses for their member firms
what are the technology implications of trade agreement?
- they will need tech to send and receive confirmations and track statusβ
- tech with the ability to support the confirmation/ affirmation/ allocation process
- need to be able to communicate with central matching engines
what does MiFIR require firms to do in post trade transparency?
requires investment firms to report all price-forming off-exchange executions by eligible MiFID investment firms in MiFID-eligible instruments
how are transaction reports different to trade reports?
Transaction reports are different from trade reports, as they are for private dissemination of data to the regulator
what are The Technology Implications of Regulatory
Transaction Reporting?
firms need to make sure they report their trades accurately and within the required timeframes to the relevant regulatory authorities
what do firms need to focus on in terms of reporting trades accurately?
- Making sure their trade capture systems record all the necessary data.
- Establishing robust business rules to ensure the correct transactions are reported.
- Integrating their technology with the regulatory authorities to automate reporting.
- Implementing operational processes to ensure all transactions are reported and any issues are addressed quickly
what do COBS rules dictate?
the minimum information that must be included in a periodic statement of account for retail customers Statements must be sent to retail clients at least once every six months, but clients can request statements every three months
