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Preface xix
Acknowledgements xxiii
Part One
Chapter 1
Introduction to Operations 3
1.1 Introduction 3
1.2 Organisational Structure of an Investment Company 5
1.2.1 Front Office 5
1.2.2 Middle Office 6
1.2.3 Back Office/Operations 9
1.3 Operations' Relationships 10
1.3.1 Clients - External 10
1.3.2 Clients - Internal 11
1.3.3 Counterparties 11
1.3.4 Suppliers 12
1.3.5 The Authorities 12
1.4 Other Business Functions 13
1.5 Summary 15
Chapter 2
Financial Instruments 17
2.1 Introduction 17
2.2 Why Do We Issue Financial Instruments? 18
2.3 Money Market Instruments 19
2.3.1 Euro-Currency Deposits 19
2.3.2 Certificates of Deposit 23
2.3.3 Commercial Paper 23
2.3.4 Treasury Bills 25
2.4 Debt Instruments 26
2.4.1 A Bond Defined 26
2.4.2 Bond Issuance 27
2.4.3 Types and Features of Bonds 27
2.4.4 Other Key Characteristics of Bonds 28
2.4.5 Types of Bond 29
2.4.6 Form of Bonds and Interest Payment 30
2.4.7 Maturity and Redemption Provisions 31
2.4.8 Calculations 32
2.4.9 Accrued Interest 33
2.4.10 First Short Coupon 37
2.4.11 First Long Coupon 38
2.5 Equity Instruments 38
2.5.1 Equity Defined 38
2.5.2 Classes of Equity 41
2.5.3 Equity Issuance 43
2.5.4 Pricing and Calculations 44
2.5.5 Examples of Local Taxes 45
2.5.6 Disclosure 45
2.5.7 Summary of Cash Market Instruments 46
2.6 Derivative Instruments 47
2.6.1 Introduction 47
2.6.2 Definitions 48
2.6.3 Derivative Usage 49
2.7 Exchange-Traded Derivatives 52
2.7.1 Introduction 52
2.7.2 The Role of the Derivatives Exchanges 53
2.7.3 Major Derivatives Exchanges 53
2.7.4 Open Interest and Trading Volumes 56
2.7.5 Futures 58
2.7.6 Options 64
2.7.7 Summary of Exchange-Traded Derivatives 71
2.8 OTC Derivatives 71
2.8.1 Introduction 71
2.8.2 Forwards 72
2.8.3 Swaps 76
2.8.4 Summary of OTC Derivatives 80
2.9 Summary 81
2.9.1 Financial Products in General 81
2.9.2 Cash Markets 81
2.9.3 Derivatives Markets 81
Chapter 3
Data Management 83
3.1 Introduction 83
3.2 Importance of Reference Data and Standardisation 84
3.2.1 Introduction 84
3.2.2 Basic Securities Transactions 84
3.3 Types of Reference Data 86
3.3.1 Required Reference Data 86
3.3.2 Data Requirements - Securities 87
3.3.3 Data Requirements - Counterparties and Customers 91
3.3.4 Data Requirements - Settlement Information 92
3.3.5 Sources of Reference Data 93
3.4 Data Management 94
3.4.1 What is Data Management? 94
3.4.2 Approaches to Data Management 94
3.4.3 Data Processing 95
3.5 Legal Entity Identification 95
3.5.1 Background to Legal Entity Identification 95
3.5.2 The "Legal Entity" 96
3.5.3 The Global Legal Entity Identifier System (GLEIS) 96
3.5.4 LEI Structure 97
3.6 Summary 99
Chapter 4
Market Participation 101
4.1 Introduction 101
4.2 Market Players 102
4.2.1 Retail Clients 102
4.2.2 Institutional Clients 103
4.2.3 Banks 115
4.2.4 Sell-Side Intermediaries 126
4.2.5 Market Regulators and Market Associations 129
4.3 Market Structure 131
4.3.1 Introduction 131
4.3.2 Regulated Markets 131
4.3.3 Alternative Trading Venues 135
4.3.4 Over-the-Counter Market 136
4.4 Summary 137
Part Two
Chapter 5
Clearing Houses and CCPs 141
5.1 Introduction 141
5.2 Overview of Clearing and Settlement 142
5.3 The Clearing House Model 143
5.4 The Central Counterparty Model 145
5.4.1 Risk Management 147
5.5 Features of CCPs and Clearing Houses 148
5.5.1 The Committee for Payment and Settlement Systems' Statistics 148
5.6 Summary 150
Chapter 6
Securities Depositories (CSDs and ICSDs) 151
6.1 Introduction 151
6.2 Historical Context 151
6.3 Definitions 154
6.3.1 Domestic (Local/National) CSDs 154
6.3.2 International CSDs 154
6.4 Central Securities Depositories 154
6.4.1 Features of CSDs and ICSDs 154
6.4.2 Functions of CSDs 155
6.4.3 The Changing World of CSDs 158
6.4.4 CSD Links and Interoperability 161
6.5 International Central Securities Depositories 163
6.5.1 Background 163
6.5.2 Features of the ICSDs 164
6.5.3 Clearstream Banking Luxembourg (CBL) 164
6.5.4 Euroclear Bank (EB) 165
6.6 Linkages - Exchanges, Clearing Systems and CSDs 167
6.6.1 United States of America 168
6.6.2 Europe 169
6.6.3 Rest of the World 170
6.7 CSD Associations 171
6.7.1 Introduction 171
6.7.2 Americas' Central Securities Depositories Association (ACSDA) 171
6.7.3 Asia-Pacific CSD Group (ACG) 171
6.7.4 Association of Eurasian Central Securities Depositories (AECSD) 172
6.7.5 European Central Securities Depositories Association (ECSDA) 172
6.7.6 Africa and Middle East Depositories Association (AMEDA) 172
6.8 Summary 173
Chapter 7
Securities Clearing 175
7.1 Introduction 175
7.2 Generic Clearing Cycle 176
7.2.1 Trade Capture 176
7.2.2 Trade Enrichment and Validation 177
7.2.3 Trade Reporting 177
7.2.4 Confirmation and Affirmation 178
7.2.5 Clearing Instructions 178
7.2.6 Forecasting - Cash 179
7.2.7 Forecasting - Securities 180
7.3 Trade Capture 182
7.3.1 Dealer's Blotter 182
7.3.2 Trade Input 182
7.3.3 Trade Output 183
7.4 Trade Enrichment and Validation 184
7.5 Regulatory Reporting 186
7.5.1 Background 186
7.5.2 Transaction Reporting 186
7.5.3 Transaction-Reporting Mechanism 187
7.5.4 Trade Repositories 188
7.6 Confirmation and Affirmation 188
7.6.1 Confirmations 189
7.6.2 Affirmation 190
7.7 Clearing Instructions 194
7.7.1 Types of Instruction 194
7.7.2 Instruction Validation 196
7.7.3 Instruction Matching 196
7.8 Forecasting - Cash 199
7.8.1 Introduction 199
7.8.2 Timing Issues 199
7.8.3 Cash Forecasting Methodology 200
7.8.4 Funding Uncertainties 201
7.8.5 Benefits of Predictive Forecasting 202
7.9 Forecasting - Securities 203
7.9.1 Introduction 203
7.9.2 Securities that are Available for Delivery 204
7.9.3 Securities that are Not Available for Delivery 204
7.10 Summary 205
Chapter 8
Settlement and Fails Management 207
8.1 Introduction 207
8.2 The Different Types of Settlement 208
8.2.1 Gross Settlement 209
8.2.2 Net Settlement 210
8.3 Delivery versus Payment 211
8.3.1 Definition of DVP 212
8.3.2 DVP Models 213
8.3.3 Settlement Instructions for DVP 214
8.4 Free of Payment Settlement 215
8.4.1 Settlement Instructions for Free of Payment 215
8.4.2 Where Settlement Takes Place 216
8.4.3 Settlement Conventions 216
8.5 Settlement Fails 217
8.5.1 Overview of Settlement Failure 217
8.5.2 Why Transactions Fail to Settle 218
8.6 The Move to Shorter Settlement Cycles 228
8.6.1 Background 228
8.6.2 Project Status 228
8.7 Summary 229
Chapter 9
Derivatives Clearing and Settlement 231
9.1 Introduction 231
9.2 Regulatory Changes 232
9.2.1 Background 232
9.2.2 Financial Stability Board (FSB) 232
9.2.3 Reform Requirements 233
9.3 Exchange-Traded Derivatives Contracts 234
9.3.1 Introduction 234
9.3.2 Derivatives Exchange and Clearing System 235
9.3.3 Give-Up Agreements 235
9.3.4 Clearing Process 236
9.3.5 Margin Calculations 237
9.3.6 Initial Margin - Eligible Assets 239
9.4 Cleared OTC Derivatives Contracts 240
9.4.1 Types of OTC Derivative that are Cleared Centrally 241
9.4.2 Trading Platforms 242
9.4.3 Trade Repositories 244
9.4.4 Central Counterparties 244
9.5 Non-Cleared OTC Derivatives Contracts 245
9.5.1 Documentation 245
9.5.2 Non-Cleared OTCD Processing 248
9.5.3 Trade Capture 248
9.5.4 Confirmation 249
9.5.5 Settlement 250
9.5.6 Collateral 251
9.5.7 Event Monitoring 254
9.5.8 Reconciliation 254
9.6 Summary 255
Part Three
Chapter 10
Custody and the Custodians 259
10.1 Introduction 259
10.2 Custody 260
10.2.1 What is Custody? 260
10.2.2 Forms of Securities 260
10.2.3 Ownership Transfer - Bearer Securities 261
10.2.4 Ownership Transfer - Registered Securities 262
10.3 Holding Securities 263
10.3.1 Register in the Custodian's Name 263
10.3.2 Nominee Account 264
10.3.3 CSD Nominee 266
10.3.4 Safekeeping Methods - Summary 267
10.4 The Custodians 267
10.4.1 Custody in a Local Market 267
10.4.2 Custody in Global Markets 271
10.4.3 Custody in the EuroMarkets 277
10.5 Target2Securities (T2S) 279
10.5.1 Introduction 279
10.5.2 Eurosystem 280
10.5.3 How T2S Will Work 281
10.5.4 Migration Plan 282
10.5.5 Further Information 282
10.6 Summary 283
Chapter 11
Corporate Actions 285
11.1 Introduction 285
11.2 Types of Corporate Action Event 286
11.2.1 Voluntary or Mandatory Events 286
11.2.2 Predictable or Announced Events 287
11.3 Participation in Corporate Actions 287
11.3.1 Fund Manager 287
11.3.2 Global Custodian 287
11.3.3 Local/Sub-Custodian 288
11.3.4 Local Central Securities Depository 288
11.3.5 International Central Securities Depository 288
11.3.6 Data Vendors 288
11.3.7 Receiving/Paying Agent 288
11.4 Entitlements, Key Dates and Claims 289
11.4.1 Entitlement 289
11.4.2 Record Date 290
11.4.3 Ex-Dividend Date 290
11.4.4 Payment Date 292
11.4.5 Claims 292
11.4.6 Key Dates for Bonds 294
11.5 Corporate Action Event Processing 294
11.5.1 Introduction 294
11.5.2 Cash Dividend 296
11.5.3 Optional Stock Dividend 298
11.5.4 Fixed-Income Bond Coupon 300
11.5.5 Floating-Rate Note (FRN) Coupon and Rate Reset 302
11.5.6 Bond Redemption 305
11.5.7 Bond Conversion 307
11.5.8 Capitalisation (Bonus) Issue 309
11.5.9 Rights Issue 310
11.5.10 Other Examples of Event Types 314
11.6 Information Flows 315
11.6.1 Introduction 315
11.6.2 The Communication Problem 315
11.6.3 Global Communication Chain 316
11.6.4 Local Communication Chain 318
11.6.5 International Central Securities Depository Chain 319
11.6.6 Summary 320
11.7 Corporate Action Risks 320
11.7.1 Introduction 320
11.7.2 Data/Information Capture Risk 321
11.7.3 Replacement Risk 322
11.7.4 Decision-Making/Election Risk 322
11.7.5 Reputational Risk 322
11.7.6 Reconciliation Risk 323
11.8 Industry Initiatives 323
11.8.1 Introduction 323
11.8.2 The International Securities Services Association (ISSA) 323
11.8.3 Giovannini Group 324
11.8.4 European Central Securities Depositories Association (ECSDA) 325
11.9 Corporate Governance and Proxy Voting 328
11.9.1 Introduction 328
11.9.2 Relations with Shareholders 328
11.9.3 Proxy Voting 329
11.9.4 Relations with Preference Shareholders 331
11.9.5 Relations with Bondholders 331
11.9.6 Company in Bankruptcy or Administration 331
11.9.7 Disclosure Reporting 332
11.10 Withholding Tax 333
11.10.1 Introduction 333
11.10.2 The Problem of Double Taxation 335
11.10.3 Double Taxation Treaties 335
11.10.4 Tax Reclaims 336
11.11 Impact on Other Departments 337
11.11.1 Introduction 337
11.11.2 Front Office 337
11.11.3 Clients 338
11.11.4 Settlements 338
11.11.5 Securities Lending and Borrowing 338
11.11.6 Reconciliations 339
11.11.7 Pricing and Valuation 339
11.11.8 Reference Data 340
11.12 Summary 340
Appendix 11.1: Corporate Action Event Type Categories 340
Appendix 11.2: Voluntary and Mandatory Events for Equities and Bonds 341
Chapter 12
Securities Financing 343
12.1 Introduction 343
12.2 Types of Securities Financing 344
12.2.1 Securities Lending and Borrowing 344
12.2.2 Repurchase Agreements 344
12.2.3 Sell/Buy-Backs 345
12.2.4 Summary of Securities Financing Transactions 345
12.3 The Players and Their Motivations 346
12.3.1 Introduction 346
12.3.2 The Buy Side 346
12.3.3 The Sell Side 347
12.3.4 Borrowing to Cover Short Positions 348
12.3.5 Borrowing Cash to Finance Inventory 349
12.3.6 Temporary Transfer of Ownership 350
12.3.7 Summary 352
12.4 Intermediaries 352
12.4.1 The Relationship between Lender and Borrower 352
12.4.2 Agent Intermediaries 352
12.4.3 Principal Intermediaries 353
12.4.4 Choices for the Lenders and Borrowers 353
12.5 Agreements and Code of Guidance 354
12.5.1 Introduction 354
12.5.2 Securities Lending Agreements 354
12.5.3 Repurchase Agreements 355
12.5.4 Code of Guidance 356
12.6 Securities Lending Lifecycle 356
12.6.1 Phase 1: Loan Initiation 357
12.6.2 Phase 2: Loan Maintenance 361
12.6.3 Phase 3: Loan Closure 367
12.6.4 Lending Fees 368
12.7 Repurchase Agreement Lifecycle 370
12.7.1 Motivations 370
12.7.2 Repurchase Agreement Types 371
12.7.3 Sell/Buy-Backs 374
12.7.4 Settlement 376
12.8 Collateral and Margin 379
12.8.1 Terminology 379
12.8.2 Types of Collateral 380
12.8.3 Repurchase Agreements (and Sell/Buy-Backs) 380
12.8.4 Securities Lending 381
12.8.5 Delivery by Value (DBV) 381
12.8.6 Repo Exposure, Haircuts and Margin 382
12.9 Default and Close-Out Provisions 384
12.9.1 Introduction 384
12.9.2 Event of Default 384
12.9.3 Consequences of an Event of Default 385
12.10 Central Counterparty (CCP) Services 386
12.10.1 Introduction 386
12.10.2 The Options Clearing Corporation (OCC) 386
12.10.3 Eurex Clearing 387
12.10.4 LCH.Clearnet 387
12.10.5 Clearstream Banking Luxembourg (CBL) 388
12.10.6 Euroclear Bank 388
12.11 Summary 389
Appendix 12.1: Credit Ratings - Long Term 390
Appendix 12.2: Delivery by Value (DBV) Class List 391
Appendix 12.3: Technology Vendors 392
Part Four
Chapter 13
Accounting for Securities 395
13.1 Introduction 395
13.1.1 Accounting and Why We Need It 395
13.2 The Accounting Equation 397
13.2.1 Key Financial Statements 397
13.3 The Accounting Lifecycle for Securities 400
13.3.1 Introduction 400
13.3.2 Trade Date 401
13.3.3 Settlement Date 402
13.3.4 Revaluation 403
13.4 Gains and Losses 405
13.4.1 Introduction 405
13.4.2 Fair Value (Mark-to-Market) 405
13.4.3 Amortised Cost 407
13.4.4 Calculation Conventions 410
13.5 The Accounting Lifecycle for Derivatives 411
13.5.1 Introduction 411
13.5.2 Exchange-Traded Derivatives 412
13.5.3 OTC Derivatives 415
13.6 Summary 416
Appendix 13.1: Closing Prices for Singapore Equities (SGX) 416
Chapter 14
Reconciliation 417
14.1 Introduction 417
14.2 Importance of Reconciliation 418
14.2.1 Internal vs. External Records 418
14.2.2 Ownership vs. Location 419
14.3 Types of Reconciliation 421
14.3.1 Reconciliation Methods 422
14.3.2 Reconciliations - Worked Examples 423
14.4 Automation of Reconciliations 427
14.5 Summary 428
About the Author 429
Index 431
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