Definition
Once a trade is executed, it must be confirmed and affirmed between the buyer and seller to ensure both sides agree on all trade details (security, quantity, price, settlement date, etc.). This is the first operational step post-trade.
Workflow
| Step | Description | Example |
|---|---|---|
| 1. Trade Execution | A trader executes an order on an exchange or OTC platform. | A fund buys 100,000 shares of Apple on NASDAQ. |
| 2. Trade Capture | Details are entered into the Order Management System (OMS). | Captured in a system like Bloomberg TOMS. |
| 3. Confirmation | The counterparty (broker) sends an electronic confirmation, often via SWIFT MT54x messages or platforms like Omgeo CTM. | Confirmation message sent. |
| 4. Affirmation | The investment manager verifies and "affirms" the trade details. | Details matched and approved. |
| 5. Instruction | Once affirmed, settlement instructions are sent to custodians. | Instructions sent via SWIFT MT515/MT543. |
Example
A trader buys 50,000 IBM shares, but the trade is booked as a "SELL" due to an input error. Without the affirmation step, this mismatch would lead to a settlement fail.
Definition
Corporate actions are events initiated by an issuer (dividends, rights issues, mergers) that affect securities. Operations teams ensure the accurate capture, election, and posting of entitlements for clients.
Workflow
| Step | Description | Example |
|---|---|---|
| 1. Announcement | A custodian or data vendor (Bloomberg, SWIFT) announces the corporate action. | "Apple declares a $0.20 dividend per share." |
| 2. Event Setup | The ops team records the event details (record date, payment date, rates) in their system. | Event created in the system. |
| 3. Position Reconciliation | Validate the firm's holdings at the record date to determine eligible positions. | Confirming 100,000 eligible Apple shares. |
| 4. Client Notification | For voluntary events, send election forms to clients. | "Do you want a cash or stock dividend?" |
| 5. Instruction Capture | Collect and confirm the client’s choice before the market deadline. | Client elects "Stock Dividend." |
| 6. Payment Processing | On the payment date, receive the entitlement and credit the client’s account. | Apple dividend credited. |
| 7. Reconciliation | Verify that payments received match the calculated entitlements and investigate any breaks. | Checking for discrepancies. |
Risks
Key risks include missed deadlines for voluntary events, calculating incorrect entitlements, and errors in SWIFT messaging (MT564, MT566), all of which can lead to financial loss.
Definition
Reconciliation is the process of ensuring that a firm's internal records (trades, cash, positions) perfectly match the external records from custodians, brokers, and clearing houses.
Types of Reconciliations
- Trade Reconciliation: Matching executed trades against broker confirmations.
- Position Reconciliation: Comparing positions in the firm’s books versus the custodian’s holdings. (e.g., Internal system shows 10,000 shares; custodian shows 9,900 → investigate).
- Cash Reconciliation: Matching the internal cash ledger against bank statements to find discrepancies like a missing dividend credit.
Settlement Fails
At the CSD level (e.g., DTCC, Euroclear), trades must be matched between buyer and seller. If they don't match, the trade fails, which can lead to penalties (e.g., under CSDR in the EU).
Definition
When a company pays dividends to foreign investors, the source country may withhold tax (WHT). Operations teams manage tax relief and reclaims based on double-taxation treaties to optimize client returns.
Mechanism
- Dividend Payment: An issuer pays a gross dividend (e.g., $1.00 per share).
- Withholding Tax: The source country retains a percentage (e.g., US statutory WHT is 30%, so the investor initially receives $0.70).
- Tax Relief/Reclaim: The investor’s custodian applies the treaty rate (e.g., 15%). They either get this reduced rate at the source or file a reclaim for the difference later (e.g., reclaim $0.15 per share).
- Documentation: The ops team prepares all necessary tax forms (e.g., IRS Form W-8BEN, residency certificates).
Example
A UK fund investing in US stocks is subject to 30% WHT. The UK-US treaty allows a 15% rate. The custodian files a reclaim to recover the 15% difference, increasing the client's net yield.
Definition
Operations teams are responsible for producing accurate client reports on holdings, transactions, and performance, which is a critical function for asset managers, custodians, and private banks.
Mechanism
- Data Aggregation: Pulling data from trading, custody, and accounting systems.
- Valuation: Marking all holdings to market using pricing feeds (e.g., from Bloomberg, Refinitiv).
- Performance Calculation: Using methods like Time-Weighted Return (TWR) or Money-Weighted Return (MWR) to calculate portfolio performance.
- Attribution: Breaking down performance by sector, region, or asset class to explain sources of return.
Definition
Securities financing allows institutions to lend or borrow securities and manage collateral to support liquidity and trading activities like short selling and derivatives margining.
Activities
| Activity | Description |
|---|---|
| Securities Lending | A lender temporarily transfers securities to a borrower (e.g., a hedge fund for shorting). The borrower provides collateral (cash or bonds). |
| Repo (Repurchase Agreement) | The sale of securities with an agreement to repurchase them later at a higher price. It functions as a secured loan. |
| Collateral Management | The daily process of monitoring, valuing, and substituting collateral, as well as applying haircuts and making margin calls. |
Summary Table
| Topic | Core Function | Example / Risk |
|---|---|---|
| Trade Confirmation | Post-trade validation | A trade mismatch leads to a settlement fail. |
| Corporate Actions | Capture & elect entitlements | Missing a deadline for a rights issue. |
| Reconciliations | Match internal vs. external data | The custodian shows a different position than the firm's books. |
| Tax Reclaims | Recover excess tax withheld | A missed reclaim leads to a permanent yield loss. |
| Client Reporting | Produce accurate valuations | A NAV misstatement can cause investor issues. |
| Collateral Management | Manage repo/lending & margin | A collateral deficiency creates counterparty risk. |
Final Interview Tips
Be prepared for questions like: “What is T+1 and its impact on trade matching?”, “Walk me through how a dividend event is processed.”, “How do you handle an unmatched trade or a reconciliation break?”, and “What’s the difference between repo and securities lending?”