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Securities Derivatives and Collateral Processing

  • Banking Operations, Derivatives
  • Duration: Two days
  • Information

    Aims of the Course

    The course aims to provide, at process overview level, the essential aspects of a number of critically important operational processes applicable across both sell-side and buy-side institutions.

    Following the programme, each delegate will be equipped to apply all concepts to whichever specific operations area they become involved with.  Their greater awareness of processes and associated risks and controls will in turn enable delegates to add further value to their management and to clients.

    Who Should Attend

    This course is an intermediate level course, and is suitable for those with an existing understanding of primary securities (equity and debt) operations activity and who would benefit from a broader understanding of operational processing, inclusive of repo, securities lending, corporate actions, OTC derivatives and collateral management.  


    Delegates should possess a thorough understanding of basic securities operations concepts prior to attending this course.


    Each topic (see Contents below) will be expanded and explained to the delegates in a structured manner (via linked building blocks), developing their knowledge through operations simulations (e.g. the Securities Trade Lifecycle), frequent exercises, diagrams, ‘live’ drawings and on-the-spot explanations. 

    The course is delivered in a brisk (or even rapid) manner, with all of the concepts being conveyed by the trainer in a concise/direct delivery style. 

    However, it is important to note that active participation of the delegates will be encouraged at all times, with both simulations and exercises designed to test the delegates’ understanding of concepts.


    The objectives of the training course are to: 

    • Provide a solid foundation of understanding across a range of challenging operations topics

    • Highlight operational concepts applicable across the spectrum of operations disciplines

    • Identify similarities and differences in the operational processing of various financial products

    • Highlight the costs of errors, and how trading & operational errors arise

    • Point out risks in processing various financial products & their associated controls

    • Emphasise the importance of client service from an operations perspective

    • Identify where client service opportunities arise within an operations environment.


    Day One

    Session 1. The Securities Trade Lifecycle: Overview

    This is a fast-paced 1-hour overview of the primary components within the trade lifecycle, focusing on the sequential steps and on the risks and controls.
    This is the background against which the settlement simulation (below) will be conducted.

    • Orders
    • Trade Execution
    • Trade Capture (Front Office)
    • Trade Capture (Operations)
    • Trade Enrichment
    • Trade Agreement (Confirmation/Affirmation)
    • Settlement Instructions
    • Settlement Instruction Statuses
    • Failed Trades
    • Trade Settlement
    • Updating Books & Records
    • Reconciliation

    Session 2. The Securities Trade Lifecycle: Settlement Simulation

    This simulation involves each delegate belonging to a particular firm; there will be multiple firms, some buy-side and some sell-side.  Each firm will have existing securities (equity and debt) positions, and will be required to 1) execute multiple trades, 2) to process each component of the trade lifecycle, and 3) to reconcile Front Office to Operations, and Operations to custodian.

    The purpose of the simulation is for delegates to confirm/increase their understanding of each trade lifecycle component, to appreciate the inter-relationships between each component, and to understand the positive and negative knock-on effects of their actions, the actions of their colleagues’ and the actions of counterparties and custodians.

    The purpose also includes having the delegates working in a close-knit team, to appreciate the importance of good and timely communication.  

    Summary: the settlement simulation mimics real-life within operations, and is an excellent way for delegates to appreciate the processing steps necessary to successfully settle a trade, and to realise how to (and how not to) undertake certain lifecycle tasks.  It is also great fun and memorable for those involved

    Session 3. Repo: Overview

    Relevance: optimisation of a firm’s resources may include the use of the firm’s existing securities holdings in order to borrow cash as cheaply as possible, via repo.  Additionally, the firm may choose to lend its equity and bond holdings in order to earn additional revenues.  Furthermore, the firm may choose to borrow securities under certain circumstances.

    • Definition & Purposes
    • Transaction Structure & Terminology
    • Bilateral Repo
    • Trade Components
    • Repo Collateral
    • General Collateral
    • Special Collateral
    • Holding Collateral Received
    • Title Transfer vs Security Interest
    • Collateral Substitution
    • Income & Corporate Actions
    • Tri-Party Repo

    Session 4. The Repo Trade Lifecycle: Simulation

    This simulation involves each delegate to remain within their firm (as per the Settlement Simulation), and to perform calculations and to carry out settlement of a repo trade throughout the various stages of the trade lifecycle, including 1) onside settlement, 2) exposure calculation, 3) making/receiving margin calls, 4) settlement of margin calls, and 5) offside settlement.

    The purpose of the repo simulation is to develop awareness of the treatment of cash borrowed / lent and bond collateral given / taken at the inception of the repo, and during the lifetime of the repo (due to bond collateral value fluctuation), and at the close of the repo.

    The repo simulation is designed to highlight the particular aspects of such collateral transactions which, if not calculated accurately throughout the transaction may lead to the firm’s exposures being under-collateralised, or the firm over-collateralising its counterparties.

    Session 5. Securities Lending & Borrowing: Overview

    • Definition & Purpose
    • Reasons for Securities Lending
    • Reasons for Securities Borrowing
    • Transaction Structure & Terminology
    • Methods of Lending / Borrowing
    • Direct with Counterparty
    • Automated via ICSDs
    • Trade Components
    • SL&B Collateral
    • Cash
    • Bonds
    • Holding Collateral Received
    • Title Transfer vs Security Interest
    • Collateral Substitution
    • Income & Corporate Actions

    Day Two

    Session 1. Corporate Actions

    Relevance: equity and bond positions (and trades) are impacted by corporate action events that are either pre-scheduled or announced by the issuer; trading positions, settled positions and open trades are all subject to adjustment.  This topic contains numerous points of risk which many institutions have experienced to their cost.  Knowledge of securities and their processing is incomplete without an understanding of this challenging topic.

    Corporate Actions Definition & Purposes

    •   Classification of Corporate Actions
    •   Benefit Events & Reorganisation Events
    •   Mandatory, Voluntary & Optional Events
    •   A selection of the most common event types, including their Purpose, Characteristics and Impact

      E.g. dividends, coupons, bonus issues, stock splits, rights issues

    Following introduction of each corporate action type, delegates are required to perform numerous mini-calculation exercises

    •   Corporate Actions Processing Overview
    •   Primary steps in the corporate actions processing lifecycle
    •   Entitlement Calculation Concepts
    •   The essential concepts in how entitled positions are determined (including ex-date and record date)

    Following explanation of the concepts associated with equity entitlement calculation, the delegates are required to calculate entitlement using a detailed and pre-defined list of trades.  A similar detailed exercise is available for coupon entitlement calculation.
      Processing Risks.  The primary points of risk in the corporate action processing lifecycle and their mitigating controls.

    Session 2. OTC Derivatives

    Relevance: the fluctuating market values of OTC derivative trades (typically) results in the exposed party receiving collateral in the form of cash or bonds, in order to mitigate its risk.  Understanding the nature of OTC derivative products is the essential background in understanding the role that collateral plays in mitigating risk.This topic is a pre-curser to the collateral management section; its purpose is to convey the nature of two of the major OTC derivative products that give rise to collateral being given or taken.

    OTC Derivatives
    This topic is a pre-curser to the collateral management section; its purpose is to convey the nature of two of the major OTC derivative products that give rise to collateral being given or taken.  Structural Aspects of OTC Derivatives

    •   Generic Product Definition
    •   The Nature of the Trade
    •   Parties to a Trade
    •   Trade Tenor
    •   Exchange of Notional Value
    •   Trade Settlement
    •   Exiting a Trade
    •   Legal Documentation
    •   ISDA Master Agreement
    •   Credit Support Annex: Overview
    •   Interest Rate Swaps
    •   Specific Purpose
    •   Trade Components
    •   Operational Responsibilities

      Example Cashflow Calculations
    Following explanation of the concepts associated with IRS, the delegates are required to calculate cashflows associated with a specific trade.

    •   Credit Default Swaps
    •   Specific Purpose
    •   Trade Components
    •   Operational Responsibilities

      Example Cashflow Calculations

    Session 3. OTC Derivative Collateral Management

    Relevance: the practice of giving and taking collateral has gained a very high profile since the 2008 financial crisis.  The collateral lifecycle relates to mitigation of exposures in OTC derivatives (and other products) and involves a defined series of steps.
    To date, collateral management has related to direct exposure with bilateral counterparties, but this will change in 2013

    Fundamental Collateral Concepts
    Definition & Purpose of Collateral
    Why the Increased Focus on Collateral?
    Overview of Collateral Lifecycle
    Cash & Bond Collateral
    Collateral Impact on Regulatory Capital: Overview
    Legal Documentation
    Credit Support Annex: Detail
    Haircut Calculation

    Session 4. The Collateral Lifecycle


    • Legal Documentation
    • Static Data


    • Trade Execution
    • Trade Confirmation

    Throughout Lifetime of Trade

    • Trade/Portfolio Reconciliation
    • Marking-to-Market
    • Exposure Calculation
    • Collateral Calls
    • Making / Receiving Collateral Calls

    Following explanation of the concepts associated with making and receiving collateral calls, the delegates are required to 1) determine net exposures, 2) issue a collateral demand notice, 3) ensure settlement using a detailed and pre-defined CSA and trade. 

    • Cash Collateral vs Securities Collateral
    • Collateral Substitution
    • Reuse of Bond Collateral
    • The English Law CSA
    • The New York Law CSA
    • The English Law CS Deed
    • Income & Corporate Actions

    Trade Termination

    Session 5. OTC Derivatives and Regulatory Change

    This sub-section will describe the background to the regulatory changes which are coming into force imminently and the resultant impact on collateral management from both a buy-side and sell-side perspective.

    • Reasons for Change
    • Required Changes
    • Exchange-Trading
    • Central Clearing
    • Trade Repositories
    • Capital Requirements

    Course wrap-up and conclusion

    Register interest

    As every course we run is tailored to meet the specific needs of each client, we can only provide an estimate after fully understanding your specific requirements. Please complete the form below of call +44 (0) 208 894 4977 to discuss how Taylor Associates can help you.

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