Technology in Investment - Chapter 6 Flashcards
What is chapter 6?
The role of technology in the Settlement and Pot-settlement phases
What is the identity of the SENDER & RECIEVER usually represented as ?
BIC Code
What is the identity of the SECURITY usually represented as ?
ISIN, SEDOL, CUSIP or some other identifier
What three methods are used to transmit settlement instructions
- SWIFT Messages
- Proprietary standard message
- Email, fax and telex
What is a status code
Codes for tracking where a transaction is in the settlement cycle
What FOUR criteria must be must for the settlement agent to settle the trade
- the value date has been reached
- the seller has the stock to deliver
- the buyer has the cash or credit to pay for it, and
- the seller’s instructions match the buyer’s instructions.
What is the main role of a instruction reference number in the automation process? (aa-111122223333-1) eg
It facilitates automation
Why is quoting the trade reference to the custodian a bad idea?
It will, by definition, generate two or more instructions.
Sometimes it may not be possible to settle in a single transaction
The effect of settlement netting
Errors are harder to rectify
What is another term for repo
Sale and re-purchase agreement
What is a repo transaction?
Trading cash for government assets (bills or bonds usually)
What is stock lending
When the borrower borrows stock of the lender to fulfil a short fall due to shorting
What two things are transferred on the start leg of a stock lend?
Securities for cash or collateral
What four things are transferred on the end leg of a stock lend?
Securities
Cash
Interest on cash or collateral
Lending fee
What is the difference between the two end legs of a repo transaction and a stock lend
No lending fee
What is the business purpose of a repo transaction
To lower interest rates on borrowings
What are the acceptable instruments for a repo transaction
Certain government bonds
What are the acceptable instruments for a stock loan
Individual equities and bonds
What is a a reason for a firm to borrow securities?
If they have short sold more stock then they have. So they must borrow to cover the difference
Reason for lending securities
To gain income on charging a fee to the borrower
What is another term for the Nominal Owner of a stock?
Legal Owner
What is an SLIs
Stock Lending Intermediaries (SLIs) Used to facilitate and fund large trade operations
If a borrower wanted to borrow a large qty of securities from an SLI for a long period of time, what 3 issues will it face?
Can not find a fund manager:
- Willing to lend such a large amount
- Willing to lend for such a long period
- Willing to accept a non-cash collateral
What is Deliver by Value (DbV)
Overnight funding between a market maker and a SLI
What does SLI stand for?
Stock Lending Intermediaries
What are automated borrowing services?
CSDs, ICSDs and custodians. Party A & B are unaware of each other and will be charged fees
What does CSDs stand for?
Central Security Depositories
What does Segregation of Client assets mean?
Client assets must be held in a separate account to that of the firms assets, even if they are the same asset.
What is a nominee account.
A separate account where clients assets are segregated at a CSD or custodian.
What 2 terms must be met for a custodian to use a clients account assets in their own accounts?
The client has given prior consent
The client pre agrees terms of how the assets are to be used.
What is an Omnibus account
A combined account that custodians use to hold combined client assets. The opposite of a Nominee account..
What, in addition to the previous two terms, are required for a custodian to use client assets in a omnibus account?
Each client has given permission
The firm has systems and controls in place that ensure only the assets for the specific client are being used
What are the five technological requirements for a firm who operate in the Stock Loans and Repos market?
Manage Collateral
Re-valuation of securities
Send/receive messages
Send relevant instructions to settlement agents
Identify securities for stock lending/repos
Ensure the custody accounts are record correctly
What is a general ledger system
A record keeping system for firms financial data
What are the three transactions which interest accrual is earned on
Purchase/Sale of bonds
Stock borrowing, lending & repos
Money market loans and deposits
What is accrued interest
Accrued interest is defined as the interest that has accumulated on a transaction since the last interest payment date or start date, up but not including the value date.
If Bank ABC borrows £1,000,000 on March 7th for 30 days at 5% interest, calculated on actual/actual basis, the maturity is 6th of April. What of the following is the correct equation?
Repayment amount = 1,000,000 + (1,000,000 x 30/365 x 5%) = £1,004,109.59
Repayment amount = 1,000,000 + (1,000,000 x 30/360 x 5%) = £1,005,107.23
Repayment amount = 1,000,000 + (1,000,000 x 31/365 x 5%) = £1,004,901.56
Repayment amount = 1,000,000 + (1,000,000 x 30/300 x 5%) = £1,004,109.59
Repayment amount = 1,000,000 + (1,000,000 x 30/365 x 5%) = £1,004,109.59 (A)
Is there interest payable or receivable on the start date of the transaction?
No
Is there interest payable or receivable on the end date of the transaction?
Yes
How many days interest are accrued on Friday of a normal week?
Three days. Friday, Saturday & Sunday
What is Straight Through Processing (STP) commonly referred to as?
Automation
What does SWIFT stand for
Society for Worldwide Interbank Financial Telecommunication (SWIFT
What two things must be present for SWIFT to be connected?
A secure IP-Based network
SWIFTNet Link.
What is SWIFTNet link?
Link software that provides security and ensures interoperability between users, and the store and forward principle.
What two protocols make up the SWIFTNet
Transmission Control Protocol (Transmission per Second)
Internet Protocol (IP)
What is the % of the Committed Data Rate is required to operate SWIFTNet
70%
What is SWIFTAlliance ?
SWIFTNet link that is embedded into a companies own system.
What is an API?
Application Programming Interfaces, allows for systems to talk to one another
What is SWIFT Gateways
3rd party products that compete with SWIFTAlliance
What is SWIFTNET PKI
Security system for SWIFT
What method of security does SWIFTNET PKI use?
Authenticator keys
What five key things does Key-Exchange provide?
Authenticity
Integrity
Non-Repudiation
Confidentiality
Access Control
What is the Store & Forward principle
Messages are sent to an intermediate station where they are then forwarded to the final destination or another intermediate station
What are some reasons for the use of the Store & Forward Principle?
Time zone differences
Different working days/bank holidays
Natural disasters
Not enough bandwidth
Interaction of SWIFT in a firms systems - At the sending firm
Trades are captured and enriched with SSI details and references data.
Then forwarded to SWIFT Gateway
If error occurs it is sent to a repair queue or it will be sent for authorization.
It is then encrypted and sent to SWIFT
Interaction of SWIFT in a firms systems - At SWIFT
Message received at European hub, is time stamped.
Given ACK or NACK status
Moves message onto local hub
Message is held until member comes online, if not already online
What does NACK mean in SWIFT messaging
Not Acknowledged
What does ACK mean in SWIFT messaging
Acknowledged
Interaction of SWIFT in a firms systems - At receiving firm
Received and decrypted
Message is directed to the right department
Un-directed messages get sent manually by a human
SWIFT Message standards, which governing body controls the standards?
International Organisation for Standardisation (ISO)
What code has the format MT100
FIN Messages (or known as MT messages)
Who regulates SWIFT messaging standards?
International Organization for standardization
What ISO standard governs all series, except for the MT500 series?
ISO 7775
What is Extensible Mark-up Language?
XML = common information formats to share and format the data on the internet, intranets, and elsewhere
What ISO number did XML language bring forward?
ISO 15022, 2nd edition
What ISO number do all SWIFT messages use since 2004
ISO 20022
What changed in 2002 in regards to the closed user groups of the SWIFT network?
It is now possible for the firms to comminute using SWIFT, in two ways. SCORE and MA-CUG
What is a closed user group?
A securities or investment firm that has been admitted to the SWIFT network
What is SCORE?
One of two ways for a closed user group to communicate with banks via the SWIFT network.
In order to use this method the firm must be listed on a regulated stock exchange which is a member of the Financial Action Task Force (FATF)
What are the member-Administered Closed User Groups (MA-CUG)
Companies not eligible for SCORE can join a MA-CUG
What is the difference between SCORE & MA-CUG
SCORE Participants SWIFT messages can be network validated by SWIFT. MA-CUG can not and will not be validated
What is a Financial Information Exchange (FIX) Protocol
Basically each broker with a FIX connection is a two way connection taking place between both their application systems. These applications are reffered to as ‘FIX engines’
What is SWIFT Net FileAct
Used to send files between parties. It supersedes the existing FIN service.
What is SWIFT Net Interact
Used for direct application-to-application transactional messaging
Why was the Financial Information Exchange (FIX) Protocol created?
Because brokers wanted to streamline their trading processes
What type of messaging standard is a Financial Information Exchange (FIX) protocol
Open message standard
What is a FIX engine
The applications at either end of the FIX Protocol. They can operate either as stand-alone or fully integrated solutions
What is an Electronic Crossing Network
Where buy and sell orders for stocks are matched and executed without going through a public exchange
What are the two levels that the FIX protocol is defined it?
Session & Application
What is the session level of the FIX protocol concerned with
The session level is concerned with the delivery of data
What is the application level of the FIX protocol concerned with
The application level defines business-related data content
What product does the Financial product Markup Language (FpML) cover?
FpML covers the OTC Derivatives industry
What does the Extensible Business Reporting Language (XBRL) cover?
balance sheets and profit and loss accounts,
In the context of CISI what 4 data points are included in the reconciliation procedure of financial data?
- Cash amounts connected with all types of transactions
- Cash balances connected with all types of transactions
- Stock and derivative accounts connected with all types of transactions
- Stock and derivative postions with all types of transactions
What is a reconciliation procedure?
The systematic process of comparing, verifying, and harmonizing data sets from multiple sources or systems to ensure consistency, accuracy, and completeness.
What is external reconciliation ?
Settlement agents reconciling the data on the firms behalf as they hold the external accounts. Like nostro accounts for example
What is internal reconciliation ?
Internal reconciliation is the act of reconciling data held in one of the firm’s business application
Why is external reconciliation important?
It is a regulatory requirement to reconcile them
What are the three key points for a firm who are internally reconciling their data
a. As often as is necessary
b. As soon as reasonably practicable after the date to which the reconciliation relates
c. To ensure the accuracy of the firm’s records and accounts.
What is the ‘Total Count Method’ for reconciling data?
It requires a;; safe custody assets to be counted and reconciled on the SAME DAY
Good business practice - Avoidance of losses. What are the three ways external reconciliation and the FCA ensure losses are kept to a minimum during the settlement and post settlement phases ?
- Fraudulent Employee activity
- Processing errors made in the firm
- Processing errors made outside the firm, eg. Settlement agents
What are two possible errors that would arise from processing errors when avoiding losses
Dividend payments
Corporate actions (Buying and Selling)
How often does external reconciliation get done by a large firms?
Large firms on a daily basis
How is external reconciliation usually achieved?
SWIFT Messages. Values are checked against one another to ensure the underlying data is correct and accurate
What is a journal voucher?
An authorized individual to sign off on external reconciliation matters when the two data’s do not match.
What does ‘Settling in tolerance mean’
During external reconciliation there may be a small difference between the cash amounts. This will have to be written off by a journal voucher
How is internal reconciliation usually achieved?
Through the same applications that external reconciliation uses
Why is internal reconcilai
as the trade in the example flows through the trade cycle, records may need to be created and updated in multiple business systems.
How can pre-agreed portfolio rules be created?
- In conjunction with the client as part of their client mandate document
- Driven by regulation
What is post trade compliance?
Ensures that a portfolio does not veer from the pre agreed rules listed in the portfolios investment mandate
What is a passive breach
where a breach occurs that is caused by market conditions outside the control of the manager or investor.
If a pre-defined portfolio rule is broken, who should it be reported to?
Fund manager
If a pre defined portfolio rule is breached, what are the two types of breach it can be?
Active & Passive
What are the IT complications of Post Trade compliance, there are 3
Ability to create & maintain the rules
Good clean data
A scheduler for the fund manager to determine when post trade compliance rules are run.
What is an active breach
1.Active breaches – where a fund manager trades (hopefully accidentally) into the wrong investment
How often are post trade compliance rules run?
Once a day. Either EoD or before trading starts in the morning
Once rules are run, what is the Post trade compliance process required to do (3)
Highlight breaches
Ensure breaches are forwarded to the correct parties
Ensure the system is kept on an access only basis and changes are clearly logged (Auditing requirement).
