Navigating the Complex World of Trade Confirmation and Settlement

In the dynamic environment of financial markets, post-trade processing and trade settlement hold immense significance to investors and
financial institutions. Precision and efficiency are imperative for maintaining smooth operations with transactions unfolding rapidly.
Despite impressive technological strides, human errors endure, casting repercussions across the industry. The shift to T+1 and T+0 settlements has intensified challenges, leaving little room for error.   

To successfully address these complex challenges, investment firms are actively searching for trustworthy and reputable partners with in-depth expertise in post-trade execution. These partners have the ability to seamlessly navigate the intricate network of transactions and provide unwavering assurance to clients in their post-trade activities. 

This blog explores the intricate landscape of trade confirmation and settlement, unravelling the six pivotal steps underpinning these essential processes. Our aim is to demystify the intricacies and shed light on the crucial stages that culminate in the seamless execution of trades within the financial realm. 

 

Key Stages Description   Highlights 
Order Placement The trade settlement process is initiated with order placement. Fund managers/ clients convey buy or sell orders to their executing brokers, outlining the security, quantity, price, and other pertinent particulars.  Fund Managers use a variety of different OEMS platforms like Eze, Enfusion, Bloomberg AIM, etc., to initiate orders.
Trade Execution Upon receiving the order, the broker assumes the role of an intermediary and initiates the trade execution process on behalf of the client. This critical phase involves translating the client’s order into actual market transactions, where the broker facilitates the buying or selling of the specified securities.  Trades are executed over the FIX network through platforms like NYFIX, and Bloomberg deployed on the executing broker systems for trade execution and matching. 
Trade Matching Trade matching constitutes a pivotal phase within the trade confirmation and settlement framework, characterized by the simultaneous electronic input of trade particulars by two distinct sources into a dedicated electronic trade matching platform. This process derives its nomenclature from its fundamental principle: the parity and equality maintained between both participating parties. The electronic trade matching platform serves as an arena where these trade details are systematically compared and validated. Through a series of automated processes and cross-checks, the platform diligently assesses the submitted particulars for congruence, highlighting any disparities or inconsistencies that require resolution.  Various trade matching platforms such as Omgeo’s CTM, MarkitSERV, Traiana, ICE Link, and BTCA facilitate trade matching by connecting counterparties and streamlining the trade confirmation process. 
Trade Validation  Trade validation is a crucial process involving a final comprehensive check of gathered information. This validation allows potential issues or discrepancies to be proactively identified and corrected before engaging with other entities. This step ensures that accurate and reliable data is communicated, minimizing the risk of errors in subsequent stages of the trade process. By offering an opportunity for rectification, trade validation contributes to the overall efficiency and integrity of the trading system, instilling confidence in all involved parties. It acts as a safeguard, preventing the propagation of erroneous information and promoting seamless trade execution.  DTCC’s GTR, SWIFT’s Accord, MarkitSERV’s TradeServ are a few trade validation systems in the market that cater to different asset classes and trade types. 
Trade Confirmation  After reaching a consensus among all involved parties, the trade enters the critical phase of trade confirmation. Here, a formal acknowledgment of the trade’s specific details and agreed-upon terms is exchanged. This includes crucial information, such as settlement instructions. Trade confirmation acts as a binding agreement, solidifying the transaction and establishing the groundwork for subsequent processing steps. This process allows potential discrepancies or misunderstandings to be identified and resolved, ensuring a smooth and transparent trade flow. Ultimately, trade confirmation plays a pivotal role in enhancing the efficiency and reliability of the overall trading process, instilling confidence in all stakeholders, and minimizing risks associated with trade execution.  Trade confirmation is a pivotal stage, signifying successful trade execution among parties. Accurate confirmation is especially crucial due to varied settlement cycles: 

  • T+2 Settlement: A traditional cycle allowing time for administrative tasks, fund transfers, and security delivery. 
  • T+1 Settlement: Shortens settlement to one business day after trade, reducing risk and expediting fund and security flow. 
  • T+0 Settlement: Instant trade completion, minimizing risk, demanding efficient infrastructure. 
Trade Clearing and Settlement  Following trade confirmation, the clearing and settlement process is initiated, facilitated by the clearing house. In this stage, the clearing house assumes the counterparty risk, acting as an intermediary to ensure a seamless settlement of the trade. Validating trade details and calculating net obligations it guarantees the availability of funds and securities necessary for settlement. By undertaking this vital role, the clearing house enhances the security and efficiency of the overall clearing and settlement process. This crucial step mitigates potential risks and minimizes the chances of payment or delivery failures, instilling confidence in market participants and fostering a stable trading environment. The settlement process involves diverse payment methods based on security type and trading venue: 

  • Cash Settlement: Securities are exchanged for cash, debiting the buyer’s, and crediting the seller’s account. 
  • Delivery versus Payment (DVP): Simultaneous security delivery and payment lower non-delivery/payment risk. 
  • Payment versus Payment (PVP): For cross-border deals, payment in one currency relies on receiving payment in another. 

 

Key Stakeholders in the Trade Settlement Lifecycle 

Stakeholders  Roles 
Executing Brokers Brokers act as intermediaries, connecting clients to financial markets. They receive and execute trade orders on clients’ behalf. Brokers also participate in trade affirmation, confirming trade specifics per client preferences before proceeding to settlement. 
Custodians Custodians safeguard and hold securities in trust for clients. Crucial to settlement, they ensure securities are available for delivery and assist in resolving discrepancies during trade affirmation. Custodians play a vital role in maintaining accuracy and security. 
Fund Managers Clients, as investors, utilize brokers to execute buy or sell orders. Initiating trade confirmation and settlement, clients drive the entire sequence through their trade instructions, playing a pivotal role in the process. 
Clearing House The clearinghouse acts as an intermediary between buyers and sellers, ensuring accurate trade settlement. Assuming the buyer role to every seller and vice versa minimizes counterparty risk and guarantees trades. This mechanism enhances market stability and safeguards the trading process. 

 

Navigating Trade Settlement Complexities 

Although the trade settlement process aims for efficiency, its complexity arises from various factors. Let’s delve into some of these intricacies and examine why clients frequently rely on external institutions (such as custodian banks and clearinghouses) for assistance in trade settlement: 

  • Regulatory requirements: Different geographical regions and financial markets adhere to distinct regulatory frameworks for trade settlement. Complying with these regulations adds intricacies that require specialized expertise to navigate effectively.  
  • International transactions: Cross-border deals introduce additional complexities related to foreign exchange dynamics, tax implications, and adherence to global legal regulations. 
  • Trade volume and frequency: Institutional investors and traders often handle a high volume of trades. Managing settlement for such a large volume of transactions can be time-consuming and prone to errors. 
  • Trade types and instruments: Financial markets host a variety of trade types and instruments, including equities, bonds, derivatives, and more. Each instrument’s settlement process possesses unique characteristics, contributing to overall complexities.
  • Time sensitivity: Timely settlements are crucial to prevent trade failures or penalties. Ensuring all parties meet deadlines requires efficient communication and execution. 
  • Risk management: Trade settlement involves counterparty, operational, and market risks. Inadequate risk management could lead to financial losses. 

In response to these challenges, investment firms are actively seeking reliable and proficient partners who can confidently manage post-trade execution activities. This is where expert consulting firms come to the forefront, offering comprehensive trade settlement services tailored to the unique requirements of investment firms. 

These firms understand the pivotal nature of the settlement process and the financial and reputational consequences of errors. With a team of experienced professionals, cutting-edge technology, and a profound grasp of the financial sector, these firms are well-prepared to handle the complexities and intricacies of trade settlement. Through meticulous attention to detail and stringent quality control, they ensure accurate and efficient processing of each trade, mitigating the risk of errors and reducing potential losses for clients. 

How FinServ Transformed Client Operations: A Short Case Study 

In a recent collaboration, FinServ Consulting showcased its commitment to tailoring solutions for a client grappling with extensive trading activities in the APAC markets.

Challenge: The client’s struggle with limited local support prompted a custom approach to enhance operations and streamline trade support.   

Solution: Understanding the client’s precise needs was vital. This led to devising tailored trade support solutions. Documenting the trade settlement process with clear procedures, timelines, and responsibilities established a transparent and structured framework. 

Our team executed the trade settlement process meticulously per the client’s instructions, swiftly resolving any discrepancies that emerged. During market volatility, vigilant trade monitoring was prioritized to protect the client’s interests from potential adversities. A robust communication channel was established to address crucial concerns promptly. Consistent updates on trade status fostered client reassurance and confidence in our services. 

Result: This engagement exemplified FinServ Consulting’s client-centric dedication. Personalization, understanding, and transparent communication culminated in empowering the client to navigate APAC market challenges confidently. 

 

Conclusion: 

Trade settlement facilitators play a pivotal role in aiding clients with their trade settlement needs. These facilitators offer an array of services aimed at streamlining and speeding up executing and finalizing trade transactions. Their services typically encompass trade matching, clearance, and settlement. Harnessing cutting-edge technologies and established networks guarantees accuracy, transparency, and security in trade settlements. Clients reap the benefits of minimized operational risks and expedited error-free settlement cycles. Moreover, these facilitators provide valuable insights and reporting, empowering clients to make informed decisions and optimize their trade activities. 

About FinServ’s Middle & Back-Office Services: 

Organizations must leverage tailored solutions to meet their unique requirements in the fast-paced and competitive financial services industry. FinServ Consulting stands out as a trusted partner, offering a comprehensive solution suite that empowers portfolio managers, operations teams, and back-office functions. By aligning technology with industry best practices, FinServ Consulting helps organizations drive efficiency, enhance decision-making, and deliver value across the board. Embrace the power of tailored financial services solutions with FinServ Consulting and unlock your organization’s potential. 

To learn more about FinServ Consulting’s services, please contact us at info@finservconsulting.com or (646) 603-3799. 

Optimizing Middle and Back Office Operations: Empowering Hedge Funds for Success

Fund managers understand that it can be difficult to support and scale their operations team; instead, they are moving to outsourced providers to satisfy critical requirements.  The right Managed Services Partner will streamline their middle and back-office operations, allowing them to focus on core business activities and capitalize on service level agreements, which include expanded coverage across multiple time zones.   

Hedge funds strive to attain strong investor returns through varied investment approaches. They must establish structured fund management, compliance, and reporting systems to accomplish this goal. This is crucial to satisfy investor demands, maintain competitiveness, mitigate risks, adhere to regulations, uphold transparency, improve efficiency, and prevent regulatory issues.  

Efficient middle and back-office operations play a critical role in ensuring seamless operations of the fund, and adherence to regulations, resulting in the generation of accurate and reliable reporting. Systematic middle and back-office operations form the backbone of a well-structured and successful hedge fund by managing the operational aspects that underpin the fund’s activities. 

Fund managers understand that it can be difficult to support and scale their operations team; instead, they are moving to outsourced providers to satisfy critical requirements.  The right Managed Services Partner will streamline their middle and back-office operations, allowing them to focus on core business activities and capitalize on service level agreements, which include expanded coverage across multiple time zones.   

This article explains the advantages of outsourcing middle and back-office functions and how it enables fund managers to enhance their operational efficiency and competitiveness in the market. 

Expert Middle & Back Office Support 

Outsourcing middle and back-office operations provides hedge funds with the benefit of utilizing a team of skilled professionals equipped with specialized knowledge. By harnessing this expertise, fund managers streamline their processes, improve productivity, and enhance risk management practices. 

  • Optimizing Hedge Fund Efficiency – Hedge funds employ diverse investment strategies to achieve returns surpassing traditional market benchmarks and align with investor expectations. However, the intricate nature of middle and back-office operations can strain a fund’s resources and time, because it requires meticulous attention to tasks such as trade execution, risk assessment, and regulatory compliance. The shift in focus from operational tasks to more investment-focused tasks allows fund managers to make more informed decisions, adapt quickly to market changes, and seize lucrative opportunities.
  • Adaptability Partnering with a service provider with diverse asset class and accounting expertise equips hedge funds for swift adaptation to market shifts and strategies. This seamless flexibility facilitates scaling in trading new asset classes, bolstering the fund’s ability to navigate market fluctuations and make informed decision-making confidently. Fund managers gain reassurance that their daily middle and back-office operations remain unaffected by altering strategies and trade volumes. Expert service providers adeptly accommodate changes, minimizing implementation time and managing the learning curve effectively.
  • Advisory Choosing the right managed service provider is of utmost importance. A reliable service provider surpasses the responsibility of guaranteeing precise daily middle-office and back-office activities. They proactively collaborate with fund managers to enhance workflows and provide advisory support. This approach involves identifying challenges and offering tailored solutions, like incorporating automated swap settlement and reconciliation processes. This is supported by implementing complex tasks like reconciling performance and financing interest against broker files; and adapting tax lot reconciliations to align with specific client preferences, ensuring accurate Profit and Loss (P&L) and General Ledger Providers play a crucial role in delivering valuable expertise and encouraging the adoption of best practices among their clients. This is achieved through a structured series of workflow assessments that are designed to enhance the efficiency and effectiveness of their client’s operations. The provider’s commitment transcends contractual obligations, validating the decision to outsource by delivering extra value. Such dedication reinforces the partnership and cultivates a successful, efficient, and productive relationship with the hedge fund.
  • Utilizing Time-Zone Difference  Asset managers collaborating with overseas outsourcing partners gain access to a dedicated and efficient support team available around the clock, spanning pre-market and early trading hours. The time zone disparity enables hedge funds to receive continuous support and real-time aid, even during their non-working hours. With a local presence in the US office, clients enjoy 24/5 coverage. Moreover, the US-based team collaborates closely with fund managers and operations heads, directly streamlining workflows and executing new strategies. This setup ensures rapid issue resolution and seamless operations, minimizing downtime and maximizing productivity. The presence of a dedicated support team empowers hedge funds to tackle operational challenges and sustain uninterrupted functionality. This dynamic contributes to their overall success and competitiveness within the market. 
  • Customization and Scalability – It is imperative that outsourcing partners recognize the distinctiveness of each hedge fund and understand the importance of catering to their unique requirements. Consequently, the right partner will offer tailored solutions to accommodate individual needs. This necessitates that the outsourced partners possess functional expertise and a technical understanding of the client’s preferred systems and technology. Customization may include curated portfolio reporting, specialized tax lot services, portfolio re-balancing, manual journal entry setups, handling swap and borrow financing adjustments, and other ad-hoc requirements unique to the fund’s operations. This level of personalized service ensures that the outsourcing partner can efficiently address the fund’s individual demands, providing comprehensive and bespoke support that enhances operational efficiency and accuracy. The ability to cater to such diverse and specific requirements further validates the value of outsourcing for hedge funds seeking a highly adaptable and dedicated partner. 
  • Risk Mitigation & Better Governance – Efficient outsourcing partners play a pivotal role in assisting hedge funds to navigate risks and enhance governance practices expertly. Their valuable service involves adeptly managing and mitigating operational risks while meticulously monitoring Net Asset Value (NAV) and discrepancies stemming from Fund Administrators’ inputs. This comprehensive process encompasses tasks like calculating dividends, swap accruals, and other non-trading calculations, alongside routine daily and month-end checks. The primary goal is to swiftly identify and rectify potential errors, thus minimizing the chances of financial complexities or regulatory issues emerging during audits. This consistent dedication to compliance and regulatory standards nurtures a deep sense of confidence within hedge funds, highlighting the integrity and professionalism that characterize their partners’ operational approaches. 

FinServ Consulting’s Role in the Middle and Back Office Industry 

FinServ Consulting’s managed services team provides efficient trade, cash, and position reconciliations, allowing front office and operations teams access to reliable, updated, and error-free information.  Accurate positions and NAV data allow portfolio managers and traders to confidently focus on order generation, including sizing and position allocations. 

In addition, our service offering includes daily P&L checks, tax lot reporting, swap financing and dividend accrual assistance, hands-on systems entries, and overall guidance with the goal of ensuring efficient month and quarter-end accounting closes.   Any discrepancies or differences with fund administrators, prime brokers, and other counterparties are resolved quickly and remediated in real-time.   

FinServ Consulting places significant emphasis on five critical service areas, enabling the delivery of quality reconciliations and back-office reporting. This is achievable due to FinServ’s extensive expertise in various aspects of hedge fund operations and a deep understanding of systems and technology. 

 

Critical Service Areas  Description   Examples 
Shadow Accounting Essential  Shadow accounting is a vital service deployed to authenticate the accuracy of fund administration books. Maintaining parallel accounts enables thorough monitoring and verification of fund transactions and positions. This approach promptly identifies and addresses potential discrepancies in Profit & Loss (P&L) calculations at month end. Additionally, shadow accounting helps mitigate reconciliation challenges arising from diverse lot liquidation methodologies used by different parties.  
  • Intra month P&L review 
  • Month-end Position P&L, Exposure, Cost, Accruals reconciliations 
  • Non-Trading Income/Expenses Reconciliations 
  • Cash Balance reconciliations 
  • General Ledger / NAV checks
  • Balance Sheet 
  • Income Statement 
  • Trial Balance 
Daily Reconciliation  Managed service providers conduct daily reconciliations of client data against each prime broker, regardless of trade volume. This daily scrutiny is crucial for T+1 settlement, ensuring accurate and timely data. By maintaining consistent reconciliations, FinServ Consulting minimizes discrepancies and offers hedge funds a real-time portfolio view at the start of each trading day, providing a performance advantage.  
  • FinServ makes sure that any differences in trade details, such as trade price, quantity, fees, and commissions, are highlighted on T+1.  
  • Further, Position quantities and exposures are also reviewed daily. 
  • All these breaks are resolved by T+2. 
Swaps and Borrow Management  Outsourcing swap financing and borrow accrual processes enables thorough validation of swap or borrow agreements with prime brokers, focusing on financing rates and payment frequencies. This ensures robust reconciliations, preventing potential data reconciliation gaps that may arise if solely left to the fund administrator.  
  • Converting intricate data from diverse Prime brokers, such as day count conventions, spread rates, benchmark indices, swap currencies, etc., into financial agreements.  
  • Ensuring these agreements are correctly linked to respective positions, guaranteeing precise financing accruals and Profit and Loss calculations. 
Tax Lot Management  Accurate tax management for share sales requires precise modelling of different lots due to varying tax implications. However, many fund administrators lack the capability for complex tax lot management. Outsourcing to tax experts who understand tax laws and can generate ad hoc reports and tax reconciliations helps avoid issues, especially during a fund administrator change, ensuring data consistency and accurate accounting.  
  • Tax lot management adheres to established rules determined by fund and account categories. Yet, Prime Brokers might deviate in asset selling, especially during month or year closures.  
  • FinServ intervenes, comprehending reports and manually refining the system to ensure precise correction of Profit and Loss data. 
Cash, Collateral and Margin Management  Accurate cash balance alignment with prime brokers and comprehensive recording of activities involving brokers, ISDA counterparties, and banks is crucial. As these activities are not always recorded in real-time, specialized tools and support are necessary for cash actions. Outsourcing these functions can ensure accurate reconciliations and proper accounting, preventing discrepancies over time and maintaining financial integrity.  
  • FinServ swiftly allocates cash, collateral, or margin transactions to the appropriate account upon receipt of prime broker reports. 
  • Employing specialized Macro tools, FinServ streamlines this process.  
  • Additionally, clients benefit from daily morning reports provided by FinServ, enhancing their ability to make informed trading choices. 

 

Conclusion

Outsourcing middle and back-office operations offers hedge funds a strategic advantage by allowing them to focus on their core business, access to specialized expertise, utilize time zone differences for non-working hours support, receive prompt responses, and benefit from tailored solutions. It enhances risk management practices, improves operational efficiency, and ensures better governance, ultimately supporting hedge funds in their pursuit of excellence in the highly competitive financial landscape. 

About FinServ’s Middle & Back-Office Services: 

Organizations must leverage tailored solutions to meet their unique requirements in the fast-paced and competitive financial services industry. FinServ Consulting stands out as a trusted partner, offering a comprehensive solution suite that empowers portfolio managers, operations teams, and back-office functions. By aligning technology with industry best practices, FinServ Consulting helps organizations drive efficiency, enhance decision-making, and deliver value across the board. Embrace the power of tailored financial services solutions with FinServ Consulting and unlock your organization’s potential. 

To learn more about FinServ Consulting’s customized financial services solutions, visit our website at https://www.finservconsulting.com. 

FinServ Opens New India Office with Middle & Back Office Outsourcing Offerings

FinServ Expands Global Presence with India Office.
The New Office Enables Better Service to Fund Clients Amid Increased Demand for Support Services & Solutions.

FinServ is pleased to announce the opening of a new office in Mumbai, India. Shaurin Jobalia, who has worked with leading hedge funds and alternate asset management firms globally, will lead a growing team in India, which has more than two decades of collective middle- and back-office experience in fund accounting. The Indian team includes professionals who have previously worked at industry-leading firms such as Enfusion, SS&C Technologies, GlobeOp, Morgan Stanley Fund Services, and Bank of America.

The office will serve funds in a broad range of areas, including:

  • Assisting with daily trade positions and cash reconciliations with custodians, prime brokers, and fund administrators.
  • Providing break analysis for any issues
  • Assisting with corporate actions and swap financing accruals and setup.
  • Providing complete shadow NAV with clients’ third-party administrators, including balance sheet and income statement reconciliations.

FinServ’s Managed Services aims to provide fund managers with customizable and scalable solutions to tailor their firms’ operations.

The opening comes at a time when two key trends are converging. First, alternative asset managers are under increased pressure to reduce costs. Fees fell to new lows in 2020 according to Hedge Fund Research, as investors pulled roughly $46 billion from funds.  Secondly, COVID-19 has disrupted day-to-day operations and provided a new set of challenges for asset managers in keeping their businesses functioning effectively. A silver lining has emerged, however. The global pandemic has accelerated the use and adoption of remote workers among fund managers.  With teams working remotely, managers have leaned on service providers and recognized that they can support operations and technology through outsourcing.

With a team in India, FinServ can meet those requirements and deliver new benefits, such as reduced costs and more flexibility. The FinServ team is unique as they bring systems expertise which allows for detailed analysis and problem solving.  In addition, the team is staffed by experienced resources that have a deep understanding of different asset classes.  If a fund trades equities, credit or privates, the team brings the appropriate knowledge to assist in the processing.  By leveraging the team, funds can efficiently scale their operations by eliminating the need to increase headcount for non-core activities, or job functions.  The new India office will support FinServ’s core consulting business across specialized middle and back office managed services, software customization and implementations, industry systems integrations, and bespoke systems development.

At a time when funds are accustomed to receiving what has historically been a commoditized service, FinServ’s team takes it a step further. The teams are well-versed in each client’s unique needs and deliver on those requirements through both a hands-on and customized approach.

To learn more about FinServ Consulting’s services, please contact us at info@finservconsulting.com or (646) 603-3799.

About FinServ Consulting

FinServ Consulting is an independent experienced provider of business consulting, systems development, and integration services to alternative asset managers, global banks and their service providers. Founded in 2005, FinServ delivers customized world-class business and IT consulting services for the front, middle and back office, providing managers with optimal and first-class operating environments to support all investment styles and future asset growth. The FinServ team brings a wealth of experience from working with the largest and most complex asset management firms and global banks in the world.