Chapter 7

Question 0

What are the main sub departments within a FCD?

Answer 0

Management accounting or product control.
Statutory reporting
Regulatory reporting
Tax management
Financial operations

Question 1

What is the general ledger sometimes known as?

Answer 1

The nominal ledger

Question 2

What does the management accounting department do?

Answer 2

1. 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.

Question 3

What does the statutory reporting department do?

Answer 3

Statutory reporting – this section produces the firm’s balance sheet and P&L account, which is then subject to both internal and external audit.

Question 4

What does the regulatory reporting section of a firm do?

Answer 4

Regulatory reporting – this section produces the financial and statistical returns demanded by the firm’s regulator.

Question 5

What does the tax management reporting section of a firm do?

Answer 5

this section will be concerned with organising the firm’s activities so that its tax liabilities are (legally) minimised

Question 6

What does the financial operations section of a firm do?

Answer 6

makes payments to suppliers, payments of expenses to staff members etc.

Question 7

What IT systems are required by an FCD?

Answer 7

Corporate general ledger system

Regulatory accounting system

Question 8

What does the general ledger system do?

Answer 8

1. 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

Question 9

What does a regulatory accounting system do?

Answer 9

– this system will be used to calculate the financial and
statistical information that the firm needs to send to its regulator.

Question 10

What calculations might an equities trading system do?

Answer 10

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.

Question 11

What calculations are bonds systems usually responsible for?

Answer 11

Calculating the interest due to the holder

Question 12

What are FX and money market trading systems responsible for?

Answer 12

Calculating interest and trade proceeds

Question 13

How often must derivative positions be revalued

Answer 13

At the end of each business day

Question 14

What calculations do derivative trading systems carry out?

Answer 14

Price fixing -
What if scenarios analysis
Position revaluation

Question 15

What are the functions of the main settlement system?

Answer 15

1. Receiving real-time trade details from the front office systems and enriching those trade details with client-specific, instrument-specific settlement instructions
2. Sending trade confirmations to clients and counterparties and ‘matching’ confirmations received from counterparties with its own records of those trades
3. Reporting trade details to regulators, in real-time and within the maximum allowed period demanded by the regulators
4. Sending settlement instructions to clearing houses, custodians, and correspondent banks
5. 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
6. 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.
7. Processing of changes to positions as a result of corporate actions, dividends, etc.
8. Forwarding details of trades, settlement and positions to the reconciliation system
9. 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.

Question 16

When does the settlement system normally forward the results of its activities to the general ledger?

Answer 16

At the end if processing the position management activity, at the end of the day

Question 17

What are the factors that may affect the accuracy of what is reported from the settlement system?

Answer 17

1. 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
2. Inaccurate reference data concerning market prices, exchange rates and bond interest payment details – this would affect the accuracy of the position management entries
3. Corporate action processing problems
4. 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
5. Human errors in order or trade entry in the front office systems that have not been corrected – these may affect any general ledger posting
6. 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
7. 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
8. 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

Question 18

What is the purpose of the reconciliation system?

Answer 18

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.

Question 19

What kind of bookkeeping convention is used by the general ledger?

Answer 19

Double entry

Question 20

What are the accounts in the general ledger

Answer 20

Assets
Liabilities
Gains
Losses 
Shareholders equity
Revenue 
Expenses

Question 21

What are derived from the general ledger?

Answer 21

The balance sheet

The income statement

Question 22

What is the accounting equation pertaining to shareholders liability?

Answer 22

Assets = liabilities + shareholders equity
A = L plus SE

Question 23

What reference data should be held for an individual general ledger account?

Answer 23

1. A unique alphanumeric code to identify the account
2. The name of the account
3. A code to represent the type of the account, i.e. bank account expense account, etc.
4. The identity of the currency in which postings are made for this account

Question 24

What balance information items should be held about a general ledger account?

Answer 24

1. The opening balance of the account
2. The date of the opening balance
3. The closing balance of the account
4. The date of the closing balance

Question 25

What transaction information items should be held about a general ledger account?

Answer 25

1. Date transaction was carried out.
2. The date that the transaction is expected to settle (value date).
3. The date that the transaction was entered into the general ledger system (entry date).
4. The money value of the transaction
5. A description of the transaction
6. A code to represent the type of the transaction (e.g. securities purchase, FX sale, etc.)
7. A ‘configuration origin code’ – this tells the user of the general leger which of the many
   systems in the configuration produces the transaction: the presence of such a code is an
   invaluable aid to resolving support calls
8. A unique transaction reference number – ideally, this reference number will be used by all
   the systems (front office, back office and FCD) that have recorded this transaction.

Question 26

Describe long position, debit balances and assets

Answer 26

if the quantity of shares purchased exceeds the quantity of shares sold, then the firm has a long position, which means that there is a debit balance in the general ledger, and the balance of the account concerned represents an asset to the business.

Question 27

Describe short position, credit balances and liabilities

Answer 27

Short positions, credit balances and liabilities - if the quantity of shares purchased is less than the quantity of shares sold, then the firm has a short position, which means that there is a credit balance in the general ledger, and the balance of the account concerned represents a liability to the business

Question 28

What system usually is responsible for selecting the correct GL account to post an entry to?

Answer 28

Main settlement system by way of an explosion table

Question 29

What does the stock record show?

Answer 29

Ownership of securities and Location of stock

The stock record may be used to identify, inter alia, the following:
1. Trade-dated book positions in securities of all types that require to be marked-to-market;
2. Value-dated book positions in bonds that need to have interest accruals calculated for
them;
3. The actual settled position in the depot;
4. Borrowing and lending opportunities

Question 30

What system is the stock record often a component of?

Answer 30

Main settlement system