What are the main sub departments within a FCD?
Management accounting or product control. Statutory reporting Regulatory reporting Tax management Financial operations
What is the general ledger sometimes known as?
The nominal ledger
What does the management accounting department do?
- Management accounting, also known as product control – this section produces the profit and loss (P&L) accounts and balance sheets for individual business units, and works closely with the managers of those business units to ensure that the income and expenditure of the units is correctly recorded, and that any financial risks are measured and appropriately contained.
What does the statutory reporting department do?
Statutory reporting – this section produces the firm’s balance sheet and P&L account, which is then subject to both internal and external audit.
What does the regulatory reporting section of a firm do?
Regulatory reporting – this section produces the financial and statistical returns demanded by the firm’s regulator.
What does the tax management reporting section of a firm do?
this section will be concerned with organising the firm’s activities so that its tax liabilities are (legally) minimised
What does the financial operations section of a firm do?
makes payments to suppliers, payments of expenses to staff members etc.
What IT systems are required by an FCD?
Corporate general ledger system
Regulatory accounting system
What does the general ledger system do?
- A corporate general ledger system. This system will record all the assets, liabilities, income and expenditure of the firm, and is likely to include specialist modules which:
a. Enable the FCD to compare this year’s P&L to the previous year’s P&L and to budgeted P&L
b. Assist the FCD in allocating expenses across departments. For example:
If the firm occupies a single building and 25% of the space in that building is occupied by the settlements department, then the settlements department needs to be charged with 25% of the rent, gas, water and property taxes.
The cost of the IT department itself needs to be re-charged to those business units that benefit from it. The FCD may need to use a number of bases for making this recharge. If, for example, there are five developers all working on an application used only by the settlement department, then the direct costs of these employees might be recharged directly to settlements. But other individuals in the IT department manage help desks, networks, desktop installations, etc. from which all business nits benefit; the cost of these individuals may be re-charged according to headcount, so, if settlements employs 35% of the firm’s staff, it would be recharged 35% of tall these ‘general’ IT costs.
. Manage the firm’s purchase ledger
What does a regulatory accounting system do?
– this system will be used to calculate the financial and
statistical information that the firm needs to send to its regulator.
What calculations might an equities trading system do?
The equities trading system may be responsible for calculating commissions to be paid by clients for performing this service, as well as fees levied by stock exchanges and regulatory bodies that need to be passed on to the client.
What calculations are bonds systems usually responsible for?
Calculating the interest due to the holder
What are FX and money market trading systems responsible for?
Calculating interest and trade proceeds
How often must derivative positions be revalued
At the end of each business day
What calculations do derivative trading systems carry out?
Price fixing -
What if scenarios analysis
Position revaluation
What are the functions of the main settlement system?
- Receiving real-time trade details from the front office systems and enriching those trade details with client-specific, instrument-specific settlement instructions
- Sending trade confirmations to clients and counterparties and ‘matching’ confirmations received from counterparties with its own records of those trades
- Reporting trade details to regulators, in real-time and within the maximum allowed period demanded by the regulators
- Sending settlement instructions to clearing houses, custodians, and correspondent banks
- Receiving settlement status reports from clearing houses, custodians and correspondent
banks about which trades have settled and which have not, and updating its records as a
result of such reports - Position management activity for bonds, equities and currencies, this involves making the
following calculations:
a. Positions in bond and equities need to be revalued at the close of business each day
as a result of changing market prices; the resulting gain or loss needs to be posted
in the general ledger
b. For each day that the bank holds a position in a bond, it will earn one day’s interest. This earned interest needs to be calculated, accrued, and posted in the general ledger system. Note that the settlement system does not usually perform these functions for positions in derivative instruments – position management for derivative instruments is usually performed by the front office system because of its specialised and complex nature. - Processing of changes to positions as a result of corporate actions, dividends, etc.
- Forwarding details of trades, settlement and positions to the reconciliation system
- Forwarding details of all the activities listed in items 1-8 that affect the general ledger to the
corporate general ledger system and the regulatory accounting system.
When does the settlement system normally forward the results of its activities to the general ledger?
At the end if processing the position management activity, at the end of the day
What are the factors that may affect the accuracy of what is reported from the settlement system?
- Inaccurate reference data conferring client’s standard settlement instructions - this would affect which general ledger account the amount receivable by or payable to the client was posted to
- Inaccurate reference data concerning market prices, exchange rates and bond interest payment details – this would affect the accuracy of the position management entries
- Corporate action processing problems
- System limitations – the investment industry is one that continually innovates. One form of
innovation is the invention of new types of equities, bonds and derivative contracts. Such innovation may involve new calculation methods and rules. If the settlements system is not enhanced to deal with these innovations, then the accuracy of its calculation may be impaired - Human errors in order or trade entry in the front office systems that have not been corrected – these may affect any general ledger posting
- Problems in receiving data from the front office systems – these might cause the data that is being forwarded to the general ledger to be late, duplicated, incomplete or inaccurate
- Problems on receiving data from the external agents such as clearing houses custodians, correspondent banks – these might cause the data that is being forwarded to the general ledger to be late, duplicated, incomplete or inaccurate
- Problems in the interface between this system and the corporate general ledger which might cause the data that is being forwarded to the general ledger to be late, duplicated incomplete or inaccurate
What is the purpose of the reconciliation system?
The reconciliation system takes in feeds about transactions, balances and positions from the main settlement systems and compares them to data received from the external agents (Including payment banks, custodians clearing houses and Central Securities Depositories) so that the bank is able to prove that its records about transactions that have settled today, as well as the resulting position from such settlements, agrees with the records of the external agents concerned.
Many firms also use a specialist reconciliation system to check that the records held by the settlements system agree to those held by the settlements system agree to those held by the front office system and general ledger. The purpose of this system is to prove that the data in the general ledger is consistent with the data held by the settlement system and by the external parties whom the firm has contracted to settle trades on its behalf. If reconciliations are not performed on a timely basis, then the firm can have no confidence that the figures reported in its general ledger are accurate various front office systems and the general ledger.
What kind of bookkeeping convention is used by the general ledger?
Double entry
What are the accounts in the general ledger
Assets Liabilities Gains Losses Shareholders equity Revenue Expenses
What are derived from the general ledger?
The balance sheet
The income statement
What is the accounting equation pertaining to shareholders liability?
Assets = liabilities + shareholders equity A = L plus SE
What reference data should be held for an individual general ledger account?
- A unique alphanumeric code to identify the account
- The name of the account
- A code to represent the type of the account, i.e. bank account expense account, etc.
- The identity of the currency in which postings are made for this account
