OTC Trade Life Cycle stands for Over the Counter Trade Life Cycle.
It refers to those trades which take place in the absence of the exchange. In such OTC trades, trade is negotiated between two counterparties directly and trade is executed. The steps involved in the OTC trade are as follows:
1 Trade Initiation stage: In this step, traders will bring all the stakeholders together and discuss the possibilities of the trade. So, it is highly customized. A discussion about the client requirement and trade structure takes place. Stakeholders involved in it can be a Legal and Compliance Team – to make sure that the trade transactions are legally correct and in compliance with the company’s policies; Operations Team – to make sure that the deal is operationally done in the system and the system supports such customized OTC deal. The operational team will know the process flow; KYC Team, Finance Team – to make it is Tax compliant; Risk Management Team – to identify the market risk, and credit risk involved in such deals; IT Team – to resolve the IT issues; Audit Team – to do the financial inspection. Thus, all these stakeholders will make sure that the system and process are in place, Static Data is set up, IT is set up and Trade is executed properly.
2. Trade Execution Stage : Trade execution stage follows the Trade Initiation Stage. Once all the stakeholders in the Trade initiation stage approve the Operational areas, IT systems, risk management, KYC, etc; trade moves to the next stage called as Trade Execution Stage. It can also be called the Trade Date here. In this stage, Front Office agrees with the counterparty for the trade and exchanges information pertaining to the following documents:
a. Memorandum and Articles of Association
b. Documented term structure of the trade
c. Signatories of all the authorized authorities
d. Evidence of nature of business
e. KYC evidence
Both the parties can also follow certain standards of trade reporting like International Securities Markets Association (ISMA) trade reporting packages or International Swaps and Derivatives Association) ISDA agreements. These agreements will have a list of checklists to be done while performing OTC trades. These are to standardize the documents.
3 Trade Capture stage : Under this stage, trade is recorded in the system of both the counterparties. All the trade details like the Name of the security, Quantity, Price, Name of the Counterparty, etc. will be recorded in the system.
4 Trade Enrichment :
Under Trade Enrichment, data received from the Trade capture team is classified into Trade Data and Static Data.
Trade Data includes those data which are specific to the trade; examples like
Name of the stock
Quantity, Price
Date of the trade
Direction – Buy/Sell.
Day Count Conventions (for Bond Interest)
Static Data also called Master Data includes those data which will not change from trade to trade, which are static. Examples are
Name of the client
Contact details – Phone no, address
SSIs. SSI stands for Standard Settlement Instructions. It includes Bank details, Currency of Settlement and Country of Settlement.
Settlement Instructions
ISIN/SEDOL/CUSIP of the security
5 Trade Verification :
After trade Enrichment, it goes to the next stage called as Trade Validation, wherein, all the Trade Data and Static Data will be cross-checked again. If there is any discrepancy, it would be amended.
6 Confirmation and Affirmation :
Confirmation refers to sending all the contract details to the counterparty so that they can cross-verify and affirmation refers to receiving all the contract details from the counterparty to be cross-verified. They can send each other the details via SWIFT, Fax, or mail.
7 Clearing : The seller should ensure that there are sufficient shares in the account and the Buyer should ensure that there are sufficient funds to pay to the buyer on the settlement date.
8 Settlement : It refers to the exchange of ownership. Payment is done using messaging systems like SWIFT, and shares are debited from the seller’s account and credited to the buyer’s account.
Ideally, all the steps should be done in T+7 working days.
