Equities and bonds are executed on exchanges so there can be no doubt over any of the trade details.
For OTC securities however there is a risk of the buying party recording and processing different trade details to the selling party
The trade life cycle is crucial to ensure that any discrepancies are found and resolved quickly.
Any trades that do not settle on their due date (for whatever reason, meaning the settlement is delayed) are known as failed trades.
Straight through processing (STP)
The objective of straight through processing is to be able to process trades completely automatically without any manual intervention.
Client advice, Indications of Interest (IOI)
Setting up master agreement (for derivative contracts this is according to ISDA)
Trade life cycle
Trade placement - typically done using an order management system
Trade validation - process of validating and registering the trade that has been entered. This involves compliance
Trade execution - agreeing to undertake a trade. This is a contractual agreement between you and the counterparty.
Trade capture - trader must make sure the trade details are recorded. There will always be a minimum amount of information that is required (security, counterparty etc).
Trade enrichment - process of adding additional static data relevant to the counterparty or settlement instructions
Trade matching - process of checking that the trade details captured are agreed with the counterparty. There is a risk the details have changed since execution. Acknowledging the trade capturing process with the counterparty before settlement of trade. process in which counterparties to the trade match the details of the completed trade
Trade confirmation - process in which clients come to know what brokers have done on their behalf. Often done using SWIFT
Trade affirmation - confirm that the trade confirmation is complete leading to trade settlement; without affirmation the trade cannot be settled
Trade pre-settlement - process of confirming trade and sending settlement instructions
Trade settlement - this is the actual exchange of securities and money as per obligations with the counterparties. The actual place of settlement is typically the location of the individual security. Most established financial centres have a central securities depository (CSD) which holds all the actual securities on behalf of its participants and facilitates the movement of cash and securities between buyers and sellers. Custodians are usually members of the central security depositiories. CHESS (Austrian), DTCC (US), EuroClear (UK, formerly CREST)
Trade reconciliation - Cash management / accounting / cash flow reconcilation
(Asset Servicing - includes administration activities performed for others (processing of corporate actions, tax reclaims and portfolio valuation).
Tie Out - This means agreeing with the counterparty that a trade exists
including the key terms of the trade
This is an intermediate step to be completed by the end of each trading day. This is in parallel with full confirmation.
Once you have tie-out you have an increased level of certainty that the payment due on the trade will be achieved.
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