Basics of

Investment Services

1. The Custodian

Investment Industry has grown two folds in this decade. This has resulted in banks focusing on better custody services to its customers (that are majorly investment funds e.g., Mutual Funds, Private Equity funds and Hedge Funds). The ability to gather assets, effectively employ technology, and efficiently process huge volumes of transactions is essential in the custody business today. The services provided by a custodian bank are typically the safekeeping, settlement and reporting of its customers’ marketable securities and cash. A custody relationship is contractual, and custodian bank has a fiduciary duty towards its customers. The custodian banks provide custody services to a variety of customers, including mutual funds, investment managers, retirement plans, insurance companies, corporations, endowment, foundations and private banking clients to name a few. Even banks that are not major custodians are in the race providing custody services for their customers through an arrangement with a large custodian bank. Custody Business is done by Investment banks as they have the ability to gather assets, effectively employ technology, and efficiently process huge volumes of transactions. With the growth of the investment industry, particularly in the mutual fund arena, the level of assets under custody has increased significantly. Services provided by a bank custodian are typically the settlement, safekeeping, and reporting of customers’ marketable securities and cash. A custodian providing core domestic custody services typically settles trades, invests cash balances as directed, collects income, processes corporate actions, prices securities positions, and provides record-keeping and reporting services. A global custodian provides custody services for cross-border securities transactions. In addition to providing core custody services in a number of foreign markets, a global custodian typically provides services such as executing foreign exchange transactions and processing tax reclaims.

1.1. The Custodian-Core Services

A domestic custodian bank typically settles trades, invests cash balances as directed, collects income, processes corporate actions, prices securities positions, and provides record-keeping and reporting services. whereas, a global custodian provides custody services for cross-border securities transactions. A global custodian also provides services such as executing foreign exchange transactions and processing tax reclaims. A global custodian typically has a sub-custodian, or agent bank, in each local market to help provide custody services in the foreign country. A big custodian bank may offer securities lending to its custody customers too. Securities lending can allow a customer to make additional income on its custody assets by loaning its securities to approved borrowers on a short-term basis. In addition, a custodian may contract to provide its customers with other value added services such as performance measurement, risk measurement, and compliance monitoring.

1.2. Custodian and Sub-Custodian Relation

A global custodian’s network of agent banks in the local markets is crucial to its ability to provide efficient securities settlement and asset servicing to its customers. These agent banks are known as sub-custodians. The global custodian relies on its sub-custodian network to provide it with valuable information on the local markets, including the securities settlement systems, market conventions, and the regulatory environment. Global sub-custodians also play important role as the volume of global assets under custody has grown rapidly in recent years as investors have looked to foreign countries for additional investment opportunities. There are credit risks to custodian being in relation with sub-custodians e.g., if sub-custodian fails, the custodian may have difficulty obtaining its customers’ securities. Second, not all markets settle transactions DVP (Delivery Vs. Payment), so there is risk if the custodian delivers securities without receiving payment or pays without receiving securities. Also, in foreign countries, the global custodian will typically completely rely on its sub-custodian to understand and comply with local laws and regulations. Lastly, before a global custodian selects a sub-custodian for a particular country, the global custodian must decide whether it should offer custody services in that market by doing analysis of the below factors:

  • Country risk, including the political, social, and economic environment;

  • Banking and securities markets, including the regulatory environment and quality of supervision, existence of insider trading/fraud rules and bankruptcy laws, and the enforceability of laws and regulations;

  • The settlement environment, including the degree of automation, the central securities depository (CSD), payment systems, and the typical settlement period;

  • Restrictions on foreign investment, including registration of foreign shares, ability to repatriate capital, exit taxes, and currency controls;

  • Investability of the market, including liquidity and depth;

  • Availability and integrity of financial information; and

  • Ability to offer custody services profitably.

1.3. Custodian Services-Safe Keeping

A custodial bank is responsible for maintaining the safety of custody assets (These could include cash, stock certificates, bonds, and other financial instruments) held in physical form at one of the custodian’s premises, a sub-custodian facility, or an outside depository. A custodian’s accounting records and internal controls should ensure that assets of each custody account are kept separate from the assets of the custodian and maintained under joint control.

1. On Premises Custody:

When a bank custodian holds assets in physical form in its vault, the bank should provide for security devices consistent with applicable law and sound custodial management. The custodian should have appropriate lighting, alarms, and other physical security controls. Vault control procedures should ensure segregation of custody assets from bank assets, dual control over custody assets, maintenance of records evidencing access to the vault, and proper asset transfers. Assets should only be out of the vault when the custodian receives or delivers the assets following purchases, sales, deposits, distributions, corporate actions, or maturities. Securities movement and control records should detail all asset movements, deposits, and withdrawals, including temporary withdrawals. The vault record should include the initials of the joint custodians, the date of vault transactions, description and amounts of assets, identity of the affected accounts, and the reasons that assets are withdrawn. Some custodians monitor their physical vault asset movement by using a computerized securities movement and control (SMAC) system which records the actual location of off-premises assets and monitors the movement of an asset during purchase, sale, or lending.

2. Off Premises Custody:

Custodians should establish strong risk-based internal controls to protect assets held off-premises. Internal controls may be either active or passive. Active controls require dual control over the authorization of all transaction information prior to data entry. Passive controls may include independent reconciliations, overdraft reports, and failed trade reports. Custodians should reconcile changes in the depository’s position each day that a change in the position occurs, as well as completing a full-position reconciliation at least monthly. Depository position changes are generally the results of trade settlements, free deliveries (assets transferred off the depository position when no cash is received), and free receipts (assets being deposited or transferred to the depository position for new accounts when no cash is paid out). When controls on free deliveries are passive, personnel.

1.3.1. Custodian Services-Settlement of Securities

Trade Initiation:

Transactions to buy or sell securities are initiated in a variety of ways. Bank custody customers may deliver buy or sell instructions to the bank by phone or fax. Some customers may place trades with their broker and inform the custodian of the terms of the trade by phone, fax, or electronic terminal. In some cases the customer, usually through an investment advisor, will place the trade with the broker and affirm the trade with the depository. In this case the bank custodian will receive instructions for settlement of the trade from the depository or settling agent. A custodian bank should have a process in place to ensure that a customer’s instructions are clear, arrive in an agreed upon format, and are properly documented (by electronic instruction, recorded phone line, fax, or in writing). The date the trade is executed is known as the trade date, and is referred to as "T" or T+0.

Trade Affirmation/Confirmation:

The trade affirmation/confirmation process occurs when a depository forwards the selling broker’s confirmation of the transaction to the buyer’s custodian. The custodian reviews the trade instructions from the depository and matches the information to instructions for the trade received from its customer. If the instructions match, the custodian affirms the trade. If the instructions do not match, then the custodian will 'DK' (don’t know, or reject) the trade or will instruct the selling broker how to handle the mismatch. The affirmation/confirmation process is generally completed by T+1 in a normal T+3 settlement cycle. On day T+2, depositories usually send settlement instructions to the custodian bank after affirmation and prior to settlement date. The instructions contain the details of the trade that has been affirmed and agreed to by the parties in the trade. Custodians will match the settlement instructions to their records and prepare instructions to their wire department to send funds or expect funds from the depository on T+3 of the settlement cycle.

Trade Settlement:

Trade settlement occurs when securities and money are moved to complete the trade. Settlement occurs on T+3 in a T+3 settlement cycle. The depository sends a settlement report to all participants on the activities for their account. The custodian should review and reconcile the depository’s settlement report to its activity report each day that asset positions change at the depository. The custodian should also compare the cash movement activity in its deposit account with its daily cash accounting control records.

Trade Compliance:

Trade compliance is the internal control process used by custodians to manage trade transactions. In this process, the custodian determines that the customer’s account has the securities on hand to deliver for sales, that the customer’s account has adequate cash or forecasted cash for purchases, that trades are properly matched or DK’d, and that the depository’s settlement instructions agree with the custodian’s SMAC system.

1.3.2. Custodian Services-Reporting and Record Keeping

Custody customers have different reporting needs ranging from only quarterly reports to real-time on-line access. Some customers, especially those involved in mutual fund management, may need customized daily reports of their activity in domestic stocks and bonds, foreign securities, derivatives, options, or other unusual investments. Customers may also require multicurrency recordkeeping and reporting capabilities. The custodian may need to develop customized reporting systems to deliver reports for custody customers. These systems may include Internet access, dial-up access, and on-line trading terminals. Custodians offering services in foreign countries must also observe the recordkeeping and reporting requirements of those countries. Reporting and recordkeeping systems are important risk management tools. A bank’s custody systems should provide activity and exception reports that allow management to effectively identify and monitor the risks in its custody operations.

1.3.3. Custodian Services- Cash Management

Cash management is a service provided to customers involving moving, managing, and monitoring cash positions associated with securities transactions. Services provided include investment of excess cash, online review of cash balances and projections, and facilitation of foreign exchange and hedging activities. Excess cash is invested in such vehicles as time deposits, money market funds, short-term investment funds, and interest-bearing accounts in a variety of currencies. A custodian typically does not have discretion to select the investment vehicles; standing instructions in the custody agreement usually direct that selection.

1.3.4. Custodian Services- Foreign Exchange

Global custodians provide foreign exchange (FX) services to facilitate settlement of cross-border securities transactions. The custody agreement should require customers to authorize foreign currency transactions, either by transaction or through the use of standing instructions. If the standing instructions do not direct the custodian to execute an FX transaction or a forward transaction, the customer should accept the risk of currency fluctuations prior to settlement. Foreign exchange services may also be used to facilitate a customer’s currency hedging activities.

1.3.5. Custodian Services- Securities Servicing

Securities servicing is a ”core“ ongoing service provided by custodians.

These services includes:

1. Income Collection: Custodians are responsible for collecting income payments received from the assets held under custody. The income payments typically take the form of dividends on equity securities and interest on bonds and cash equivalents. Custodians inform customers of projected income payments, enabling the customers to make their cash productive as soon as possible.

2. Tax Reclaims: Many countries impose withholding taxes on dividends and interest payments to nonresident investors. Custodians may provide a service to minimize foreign withholding taxes or reclaim taxes withheld for their customers. To obtain relief at source, the custodian generally has to file a form or statement on behalf of the client, certifying the investor’s tax status and country of residence for tax purposes. To reclaim excess withholding tax, a custodian generally is required to file a form with a country’s tax authority. Some tax authorities may require the beneficial owner of the securities to sign this refund claim. The documentation requirements, time frames for filing, and other regulations vary depending on the treaty and the country’s taxation rules. A custodian must know the tax rates for each of the countries in which it provides custody. Dividends, interest, and capital gains may all be taxed at different rates.

1.3.5. Custodian Services- Securities Lending

Securities lending is the practice of loaning shares of stock, commodities, derivative contracts, or other securities to other securities firms. Securities lending has evolved into one of the most important value-added products custodians offer to their customers. Custodian banks first began lending securities to brokers on behalf of their clients. Globalization, resulted in the development of “offshore” securities lending markets, where securities lending transactions were settled on the books of foreign sub-custodians.

1.3.6. Custodian Services- Document Custody Services

The advent of the mortgage-backed and asset-backed securities industry created a need for document custodians. Banks provide initial, final, and re-certification services for federal agencies and private issuers in accordance with contractual guidelines. Services include document safekeeping (for Asset Backed Securities issues like residential mortgages, home-equity loans, commercial mortgages, student loans, credit cards, automobile loans, and leases), inventory control, and loan warehousing. Procedures should ensure that documents in a bank’s control are adequately secured in a protected area. All document movements should be controlled and recorded. Inaccurate or delayed certifications and missing documents may result in monetary loss or loss of business. In extreme cases of noncompliance with agency guidelines, the agency may revoke a bank’s ability to be a custodian for agency issues.

1.3.7. Custodian Services- Corporate Action

Corporate Action: A corporate action is an event related to capital re-organization affecting a shareholder. Examples of corporate actions include rights issues, stock dividends, stock splits, and tender offers. Custodians are responsible for monitoring corporate actions for the securities they hold under custody. The contract should clearly define the responsibilities of each party involved in processing corporate actions. The custodian is typically notified of corporate actions by a vendor data feed; however, in some emerging markets the custodian relies on a sub-custodian to monitor corporate actions within its market. Once the custodian is notified of a corporate action, it identifies which accounts hold the security. If the account holder has a specified time to decide whether to accept the corporate action, the customer should be promptly contacted. The custodian should have a process to monitor the corporate action to ensure that the customer has given a complete response by the due date. When a customer’s instructions are received, the custodian sends the instructions to the company (or in the case of a foreign corporate action, to the sub-custodian) for execution. The custodian monitors the status of the action to ensure timely settlement.

The different types of corporate actions (whose terminology may vary by country and market) are:

1. Bond Calls: The right to redeem outstanding bonds prior to their scheduled maturity.

2. Bonus Share Plan: Allows shareholders the option of receiving their cash dividend in the form of additional shares. Discounts toward the purchase of additional shares are usually offered. Similar to a dividend reinvestment plan.

3. Capital Gains Distribution: Realization of capital either in shares or cash.

4. Cash/Stock Option Dividend: Shareholder has the option of receiving cash dividends or additional shares. The shares are offered at a specific ratio (for example, one new share for each 50 shares owned).

5. Class Action: Technically not corporate action but managed in a similar manner. A class action is a court action filed on behalf of a group of shareholders. In a class action, shareholders who purchased or sold the company’s securities during a specific period of time, known as the class period, usually allege that the company and its officers and directors violated federal and state securities laws.

6. Convertible Securities: Corporate bonds or preferred stock that the holder can exchange, at his or her option, for another type of security (typically common stock) at a set price. The conversion ratio determines how many shares of common stock will be received in exchange for the convertible security at the time of conversion.

7. Dividend Option: A dividend payment that carries an option to accept stock in place of cash.

8. Dividend Reinvestment Plan (DRIP): A plan sponsored by an issuer that allows shareholders to buy the company’s stock with their cash dividends.

9. Mergers/Takeovers: The merger of two or more companies under a single corporate structure or the acquisition of one of more companies by another company. Payments may be in the form of shares of the resulting company, cash, or a combination of the two. A name change may also be involved.

10. Mini-Tenders: Tender offers for less than 5 percent of a company’s stock. Mini-tender offers typically do not provide the same disclosure and procedural protection that larger, traditional tender offers provide.

11. Nominal Change: A change in a security’s par value to its current price in the market.

12. Optional Conversions: Conversions in which the customer has the option of converting a security into more than one other security (i.e., warrants, stock, bonds).

13. Options and Warrants: These actions come in two forms, convertible at any time during their life, or convertible on a set date.

14. Placings: Issues of new shares that are privately placed with larger institutions (or new issues for which larger institutions are given preference). Not generally offered to the public.

15. Proxies: A document that enables shareholders to vote on a company’s proposals without attending the shareholder meeting.

16. Redemption: Maturity of a debt security when the nominal value becomes due and payable to the holder. Types of redemptions include maturities, calls, and sinking fund redemptions. Redemptions may be partial.

17. Rights Issue: An offering allowing existing shareholders to purchase newly issued stock by means of rights which can be traded, exercised, or allowed to expire. The number of rights offered to each shareholder is calculated by inserting the shareholder’s existing holding in a predetermined formula. In most cases, the price per share available to shareholders is lower than the market price.

18. Stock Bonus Issue: Similar to a stock dividend. The issue of stock to existing shareholders at a set ratio.

19: Stock Dividend: Dividend paid in additional shares of stock. In certain countries these issues may be traded for a short period of time.

20. Stockholder Meeting Announcements:Announcements of regularly scheduled and special stockholder meetings. Meeting announcements and any accompanying proxy materials are typically passed on to the beneficial owners of the securities.

21. Stock Split/Par Value Change: Issuance of additional stock to existing shareholders, typically expressed as a ratio (e.g., 2-for-1 split). In a reverse split, the number of shares are reduced (e.g., a 1-for-3 ratio of new shares for old).

22. Subdivision: The division of existing stock into a greater number of shares of lesser value; the overall value of the holdings is unchanged. Similar to a stock split.

23. Subscription: An issuance of stock in which preference is given to existing shareholders. An existing stockholder is allowed to purchase the new shares before the public can, typically at a discounted price.

24. Tender Offer: A formal offer to purchase a holder’s shares at a price higher than the market price. The offer may be for all of the outstanding shares or just a portion.

2. Executing Broker

Executing brokers often do not work in Silo and are part of large prime brokerage firms (e.g., of a prime brokerage firm can be Goldman Sachs, Morgan Stanley) usually executing large volumes of trades. They are known for executing trade orders received from their customers who are usually the institutional customers or Hedge Funds. The main job of the executing brokers is acting on an order received. For e.g., if the client wishes to purchase securities, the executing broker will search for a deal either in a Stock exchange, or in an OTC market or internally if available. Let us check how it works:

1. Stock listed on an Exchange:

For a stock that is listed on an exchange, executing broker may direct the order to that exchange, to another exchange, or to a firm called a "market maker." A "market maker" is a firm that stands ready to buy or sell a stock listed on an exchange at publicly quoted prices. Executing broker may also en-route the order (especially a limit order) to an electronic communications network (ECN) that automatically matches buy and sell orders at specified prices.

2. Stock available in OTC:

For a stock that trades in an over-the-counter (OTC) market, executing broker may send the order to an “OTC market maker.”

3. Internalization:

Executing broker may decide to send the order to another division of broker firm to be filled out of the firm's own inventory. This is called “internalization.” The executing broker may make money here on the "spread" which is the difference between the price the firm paid for the security and the price at which the firm sells it to its customer.

2.1. Executing Broker-Duty of Best Execution

Many firms use automated systems to handle the orders they receive from their customers. In deciding how to execute orders, executing broker has a duty to seek the best execution that is reasonably available for its customers' orders. That means executing broker must evaluate the orders it receives from all customers in the aggregate and periodically assess which competing markets, market makers, or Electronic Communication Network (/ECNs) offer the most favorable terms of execution. The opportunity for "price improvement" is an important factor a broker should consider in executing its customers' orders. "Price improvement" is the opportunity, but not the guarantee, for an order to be executed at a better price than the current quote. Of course, the additional time it takes some markets to execute orders may result in your getting a worse price than the current quote - especially in a fast-moving market. So, executing broker is required to consider whether there is a trade-off between providing its customers' orders with the possibility, but not the guarantee, of better prices and the extra time it may take to do so.

3. Prime Brokers

The growth in the number of hedge funds as well as the scale of their operations quickly created the need for a special kind of intermediary that would cater to their needs. As hedge funds started trading regularly, their operations became complex and difficult to manage. The technology and infrastructure required to manage these operations was expensive and since it was not a part of the hedge fund’s core business, it was not a worthwhile investment for them. Investment banks saw an opportunity here and they became this intermediary called the “prime brokers”. As the time passed even some of the large financial institutions also started offering such services. The prime brokers offer wide range of often bundled services mainly to hedge funds however, some large institutional clients also take prime brokerage services as per their requirements. The prime broker services includes but is not limited to execution of trades, settlement, financing and custody. Let us check on some of the important ones:

1. Agency Securities Lending: In Securities lending the owner of securities transfers it temporarily to a borrower. The borrower is contractually obliged to return the securities as per the agreement either on demand, or at the end of the agreed loan period which usually is for a short term. In this securities lending transaction the prime broker connects the lender (also called the beneficial owner) and an approved borrower of the prime broker and collects commissions and processing fees. Since, the prime broker here acts as agent lender, the process is called agency securities lending. The prime broker in the transaction either receives cash or other securities (usually high grade securities such as government bonds) as collateral from the borrower. The prime broker also earns by investing the cash somewhere else till the loan period ends.

2. Funding: Prime brokers provide leveraged loans to their clients such as hedge funds. A prime broker provides access to a virtually unlimited pool of money at short notice for reasonable interest rates. The clients purchases additional securities using this levered loan.

3. Capital Introduction: The prime brokers introduce their investor clients who are ready to invest to their other clients who wants investments. Taking example of hedge funds, the prime brokers introduce their hedge fund clients to the their other clients who are leading pension plans, endowments, foundations, family offices, sovereign wealth funds, insurance companies, funds of funds, private banks and consultants who are willing to provide funding to hedge funds.

4. Clearing and Settlement Services: Prime Brokers provide trade clearing and settlement services. For example, a hedge fund traditionally operates through accounts at a number of brokerage firms, it commonly instructs these executing brokers to clear all trades through its designated prime broker. This simplifies reporting and operations for the hedge funds.

5. Corporate Actions: A Prime broker processes Corporate actions such as stock splits, dividends, mergers and acquisitions, rights issues and spin-offs for their clients.

6. Synthetic Prime Brokerage: An alternative to the cash trading, synthetic financing is a business of prime brokers that facilitates client access to options, futures and swaps.

4. Registrar or Transfer Agents

Transfer agents (also called Registrar) record changes of ownership, maintain the issuer's security holder records, cancel and issue certificates, and distribute dividends. Because transfer agents stand between issuing companies and security holders, efficient transfer agent operations are critical to the successful completion of secondary trades.Some examples of transfer agents are financial companies, trust companies and banks. Transfer agents are required to be registered for example, transfer agents which are investment companies are registered with Securities Exchange Commission (SEC) or if the transfer agent is a bank, with a bank regulatory agency in United States. There is no Self Regulatory Organization that governs transfer agents. Transfer agent or stock transfer agent is the term used in the United States and Canada. Share registry is used in the United Kingdom, Australia and New Zealand. Transfer secretary is used in South Africa. For investment funds, transfer agent functions and fund administration are interdependent, making it desirable in some cases for fund managers to assign both services to a single third party.

1. Record Keeping: The primary job of Transfer agents is recording, and maintaining ownership of each issuer’s securities.

2. Registrar: “Registrar to an issue” means any person carrying on the activities in relation to an issue including collecting application forms from investors, keeping a record of applications and money received from investors or paid to the seller of securities, assisting in determining the basis of allotment of securities, finalizing the list of persons entitled to allotment of securities and processing and dispatching allotment letters, refund orders or certificates and other related documents.

3. Transfers: Issue and cancel certificates to reflect changes in ownership. Also, when a company declares a stock dividend or stock split, the transfer agent issues new shares and keeps records of the holding of investors or shareholders.

4. Paying Agent: As paying agents the transfer agents are designated to make dividend, coupon, and principal payments to a security holder on behalf of the issuer.

5. Shareholder Communication: Transfer agents facilitate communications between issuers and registered shareholders.

6. Proxy Agents: Transfer agents often act as a proxy agent (sending out proxy materials) and a mailing agent (mailing the company's quarterly, annual, and other reports). Transfer agents may also run annual meetings as inspector of elections, proxy voting, and special meetings of shareholders.

7. Information Source: Transfer agents help securities holder on information of lost, destroyed, or stolen securities.

5. Fund Administrators

Typically an investment bank provides fund administration services to funds such as mutual funds or hedge funds or private equity funds for execution of activities including fund accounting, financial reporting, net asset value calculation, capital calls, distributions, investor communications. The administrative activities may include the following administrative functions:

1. Calculation of the Net Asset Value ("NAV"): The Net Asset Value (NAV) is the calculation that determines the value of a share in a fund of multiple securities, such as a mutual fund, hedge fund, or exchange-traded fund (ETF). While stock prices change constantly when markets are open, the NAV of a fund is calculated at the end of business each day, to reflect the price changes in the investments owned by the fund. This NAV calculation makes it easy for investors to track the value of their shares in a fund, and the NAV of a share in a fund generally establishes its selling price. Under NAV Calculation the following jobs are done by fund administrator:

2. Trade Capture: Trade capture is a process to book a transaction into a front-office trading system, such as inputting all trade details in the official book of record system, linking all reference data, and calculating profit and loss. Middle office and back office will verify the trade and assess the risk.

3. Security Evaluations: Security evaluation is monitoring, identifying and analyzing market trends, Portfolio analysis to ensure consistency and appropriateness and Asset analysis to identify and manage significant value-changing events.

4. Reconciliations: Fund admins does Trade Reconciliations, Position Reconciliations, P&L Reconciliation by Position, P&L Reconciliation by Investor and Cash Reconciliations.

5. Expense Calculations: Expense calculations include all the expenses incurred during management of the fund.

6. NAV Reporting: NAV is computed and reported as of a particular business date, all of the buys and sell orders for funds are processed based on the cutoff time at the NAV of the trade date. For instance, if the regulators mandate a cutoff time of 1:30 p.m., then buy and sell orders received before 1:30 p.m. will be executed at the NAV of that particular date. Any orders received after the cutoff time will be processed based on the NAV of the next business day.

7. Annual report or semi annual report preparation: The administrators prepare Table, chart or graph of holdings by category (e.g., type of security, industry sector, geographic region, credit quality, or maturity), a complete or summary list of holdings, condensed financial statements, fund’s returns upto 10-year periods, Management’s discussion of fund performance etc.

8. Preparation of offering Materials: Offering material mean a Fund’s currently effective prospectus and most recently filed registration statement with the competent authority (such as SEC in U.S.) relating to shares of such Fund.

9. Fund Accounting Services: Fund accounting is done by administrators for real estate, private equity, hedge funds and fund of funds including services such as day-to-day accounting, management reporting, consolidation services, NAV calculation per fund guidelines, and financial statements preparation.

10. Miscellaneous Activities:

a. Settlement of daily purchases and sales of securities, ensuring collection of dividends and interests and Calculation and payment to the transfer agent of dividends and distributions.

b. Draw downs, or capital calls, are issued by fund administrators to limited partners or investors of generally private equity funds, when the general partner has identified a new investment and a portion of the limited partner's committed capital is required to pay for that investment.

c. Fund distribution or the income generated from fund awarded to investors.

d. Investor communications.

6. Fund Managers

Fund managers can be individuals or entities managing the day-day operations of a fund. The fund manager either receives commission for managing funds or earn a profit margin in the profits generated by the funds. Fund managers oversee the following fund types:

  1. Mutual Funds.

  2. Pension Funds.

  3. Endowment Funds.

  4. Private Equity Funds.

  5. Hedge Funds.

  6. Trust Funds.

  7. Index Funds.

  8. ETF's.

  9. CDO's and

  10. ICAV's.

The fund manager builds portfolios of funds taking into account the objectives of the investors, the strategies of the fund, risks in the investment, expenses that may incur and and by following the guidelines of regulators of that country. Some funds are required to be registered, the fund manager takes full responsibility of building and filing a preliminary prospectus for the fund. The fund managers are judged based on how well their funds perform and how they deliver growth that is above the interest rates and inflation rate. there are two types of Fund Managers namely,

1. Active fund managers: The job of active fund managers is to make research on investment related decisions, pick and choose investments, with the aim of delivering a performance that beats the fund's stated benchmark. Together with a team of analysts and researchers, the manager will 'actively' buy, hold and sell stocks to try to achieve this goal.

2. Passive fund managers: Passive fund managers, trade securities that are held in a benchmark index. A passive portfolio is typically designed to parallel the returns of a particular market index or benchmark as closely as possible. The purpose of passive portfolio management is to generate a return that is the same as the chosen index. A passive strategy does not have a management team making investment decisions and can be structured as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust (UIT).

7. Investment Advisers

An investment adviser is a firm or person that makes investment recommendations, for a fee, commission or remuneration, to clients such as individuals or funds or investment vehicles about investing in securities stocks, bonds, mutual funds, exchange traded funds , and certain other investment products and/or in issuing reports or analyses regarding securities, as part of a regular business. Advisers typically provide ongoing advice about buying, selling and/or holding investments and will monitor the performance of client investments and their alignment with client's overall investment objectives. The fee that client pay for this advice is typically based on the value of all of the assets held in an account with the adviser. Client may also pay other fees and costs related to servicing account and the investments that client buy, sell or hold. Advisers also may give advice about market trends or asset allocation or offer financial planning services. Investment advisers are required to be registered with a competent authority for example in United States, the investment advisers are registered with Securities Exchange Commission (or SEC) and hence are also called Registered Investment Advisers.

8. Central Securities Depository

A Central Securities Depository (CSD) is an entity which provides a central point for depositing financial instruments (“securities”). CSD's offer settlement and safekeeping services for different types of financial instruments. These can (but do not always) include money market instruments (treasury bills, commercial paper…), bonds (corporate and government and supranational debt, in different forms, including structured securities), equities (shares in listed companies), investment funds (UCITS, pension funds, hedge funds…) and many other instruments depending on the markets under consideration (e.g. commodities, carbon emission rights etc.). These instruments can be traded on an organised trading venue (securities exchange, multilateral trading facility…) or over the counter (OTC). In many countries, CSDs were historically set up by, or under the auspices of, national financial authorities such as the central bank or the Ministry of Finance. However, following the deregulation of financial markets in the 1980s-1990s, most CSDs have become privately owned entities. Only a few central banks still operate settlement systems directly (and typically only for government-issued securities), but in some countries they have maintained an ownership stake in the domestic CSD. CSDs’ clients are typically financial institutions themselves (such as custodian banks and brokers). The core functions performed by a CSD are:

1. Operates a securities settlement system (“settlement service”): CSD's operate IT platforms allowing for the settlement of securities transactions. A transaction is “settled” once the CSD has credited the account of the buyer with the purchased securities (and debited the corresponding cash amount), while debiting the account of the seller with the securities (and crediting its account with the corresponding cash amount). Such credit and debit movements typically take place simultaneous, in a process called “delivery versus payment” or DvP.

2. Records newly issued securities in a book-entry system (“notary service”): This refers to the role played by CSD's in relation to the securities issuance process. Indeed, CSD's can be described as the “first entry point” for newly created securities. Such securities, issued for example by private companies or public institutions (called “issuers”) are usually deposited into a single CSD, called the “issuer CSD”. The CSD is then often responsible for ensuring that the number of securities initially created equals the total number of securities in circulation (booked in investors’ accounts) at any time. This is what is meant by “ensuring the integrity of the issue”..

3. Provides and maintains securities accounts at the top tier level (“central maintenance service”): This refers to the fact that, once a transaction is settled, the rights and obligations linked to the securities holdings must be managed. CSD's therefore also provide for the safekeeping (or “central maintenance”) of securities, including for example the processing of corporate actions such as dividend and interest payments, or voting rights in the case of shares. The notion of “top tier level” means that CSD's find themselves at the top of the securities chain, i.e. all holdings in a given financial instrument, whether by an individual or a financial institution, are ultimately kept in a securities account at the CSD.

Further, issuers are private companies or public sector institutions (or any other type of eligible entities) which issue securities (for example shares or bonds) to investors. These securities, once created, are usually recorded and deposited in a single CSD, called the “issuer CSD”. The CSD is then often responsible for ensuring that the number of securities initially created equals the total number of securities in circulation (booked in investors’ accounts) at any time. This function is sometimes referred to as “ensuring the integrity of securities issues”.

To Summarize, the CSD's are responsible for Safekeeping Securities (in dematerialized form or book-entry form or in physical form), Listing of new issues in a market, some CSD's based on customer relation are providing services of dividend, interest, and principal processing, corporate actions, securities lending and borrowing, matching, repo settlement, ISIN assistance, pledging of share and securities.

9. International Central Securities Depository

Whereas CSDs were primarily created to serve their domestic market, ICSDs or “international CSDs” were created in the 1970s to settle eurobonds, i.e. international bonds denominated in a different currency from that of the country in which they are issued. Over the years, ICSDs have extended the scope of their services to cover all types of internationally-traded financial instruments, including equities and investment funds. Examples of international CSDs include Clearstream (previously Cedel), Euroclear and SIX SIS. While viewed as a national CSD rather than an ICSD, the US Depository Trust Company (DTC) does hold over $2 trillion in non-US securities and in American depository receipts from over 100 nations.

10. Settlement Agents

For securities transactions, a clearing firm or clearing house acts as a settlement agent. Stock exchanges have clearing houses that have a wide range of responsibilities to ensure the smooth settlement of trades. These responsibilities include collecting and maintaining margin funds, ensuring delivery of purchased securities, and reporting transaction details to all parties. A settlement agent performs the following tasks:

· Clears all trades;

· Determines obligations of members;

· Arranges for pay-in of funds and securities;

· Arranges for pay-out of funds and securities;

· Assumes the counter-party risk of each member and guarantees financial settlement.

· Settlement of transactions on other stock exchanges and the Over the Counter Exchanges.

11. Clearing Houses

Non-cleared trades can result in settlement risk, and, if trades do not clear, accounting errors will arise where real money can be lost. Hence, a clearing house facilitates the exchange of payments, securities, or derivatives transactions. There can be a clearing house per financial instrument or one clearing house for all financial instruments. Clearing house has several member participants who agree to exchange financial instruments via that clearing house meaning, the clearing house stands between two member participants. The purpose of clearing house is to ensure that its member participants do not fail to honour its trade settlement obligations. The clearing house does reconciling activities of purchases and sales of various options, futures, or securities, and the direct transfer of funds from one financial institution to another. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities, ensures the delivery of the security to the buyer. An example of a clearinghouse is the London Clearing House, which is the biggest derivatives clearing house. Clearing of securities is taken care by clearing firms inside a stock exchange. The clearing house does the following functions:

1. Validate incoming instructions from the buyer and seller (or their agents). The validation process ensures that the instructions are potentially correct (e.g. that the board lot size matches with the reference database, the price is within a prespecified tolerance and the correct amount of accrued interest accounted for).

2. Match the buyer’s receive instructions to the seller’s delivery instructions. If the details in both instructions agree, then the clearing house can assume that these instructions refer to the same underlying transaction and that both parties agreed to the economic terms. Where instructions do not agree, the clearing house will mark these with the status “Unmatched”. The clearing house will not allow any unmatched transactions to go forward for settlement and both the buyer and the seller will be required to investigate the reasons why their instructions do not match.

3. The clearing house will judge whether there are sufficient assets to enable settlement to take place. This includes sufficient cash (or credit or access to financing) for the buyer and asset availability for the seller.

4. On the intended settlement date the clearing house will allow the transaction to settle, subject to availability, and will pass details of this to a third party where the transaction will actually settle. This third-party entity is known as a central securities depository.

12. Central Counter Parties Clearing House (CCP)

A central counterparty (CCP) interposes itself between counterparties to financial contracts traded in one or more markets, becoming the buyer to every seller and the seller to every buyer. CCPs have long been used by derivatives exchanges and a few securities exchanges and trading systems. In recent years they have been introduced by many more securities exchanges and have begun to provide their services to over-the-counter (OTC) markets, including markets for securities repurchase agreements and derivatives. A CCP has the potential to reduce significantly risks to market participants by imposing more robust risk controls on all participants and, in many cases, by achieving multilateral netting of trades. It also tends to enhance the liquidity of the markets it serves, because it tends to reduce risks to participants and, in many cases, because it facilitates anonymous trading. However, a CCP also concentrates risks and responsibility for risk management in the CCP. Consequently the effectiveness of a CCP’s risk controls and the adequacy of its financial resources are critical aspects of the infrastructure of the markets it serves. A risk management failure by a CCP has the potential to disrupt the markets it serves and also other components of the settlement systems for instruments traded in those markets. The disruptions may spill over to payment systems and to other settlement systems. Because of the potential for disruptions to securities and derivatives markets and to payment and settlement systems, securities regulators and central banks have a strong interest in CCP risk management.

The following are examples of the CCP:

  • SIX x-clear (Switzerland);

  • National Securities Clearing Corporation (USA);

  • ASX Clear (Australia);

  • CDS Clearing & Depository Services (Canada);

  • China Securities Depository and Clearing Corporation4 (China);

  • Eurex Clearing (Germany);

  • LCH.Clearnet (France, Belgium, Italy, Netherlands and UK);

  • CCASS (for trades executed on the Exchange Trades-Continuous Net Settlement System)

  • (Hong Kong);

  • Japan Securities Clearing Corporation (Japan);

  • National Securities Depository (Russia);

  • SGX-Central Depository (Singapore);

  • OMX Derivatives Markets (Sweden).

13. Trade Life Cycle

1. Sales Stage:

Marketing persons from financial services provider such as investment banks, brokers and dealers introduce various financial products and vehicles to clients. Investors or institutional fund managers survey the market and find the most suitable and competitive products and open an account with the financial services provider.

2. Placing a Trade and Execution:

Placing a trade means an order or instructions given by the investors or customer of a financial services provider such as a broker firm to execute a trade. The execution of an order takes place when a filled instruction copy is received from the investor and financial services provider agrees to carry it out. Trade execution happens by noting the following:

Instructions type: buy or sell; a specific quantity of; a specific security. And will contain a number of features that are relevant to the price, including:

Limit—a price is specified, meaning, when buying, pay no more than the stated price when selling, accept no less than the stated price.

At Best—at the best available price, also known as an At Market Order and

Stop Loss—sell if and when the market price falls to the stated price

and a number of time related features, such as:

Fill or Kill—complete the entire order in full, or reject it immediately, without partial execution

Good Till Cancelled—the order remains open until it is executed, or the order is cancelled by the client, also known as an Open Order.

Investors who trade through online brokerage accounts do not have a direct connection to the securities markets. When investors push the order, the order is sent over the internet to the investor's broker, who in turn decides which market to send it to, for execution. A similar process occurs when investors calls the broker to place a trade. Brokers generally have a choice of markets to execute investors trade in the following manner:

1. For a stock that is listed on an exchange, broker may direct the order to that exchange, to another exchange (such as a regional exchange), or to a firm called a "third market maker." A "third market maker" is a firm that stands ready to buy or sell a stock listed on an exchange at publicly quoted prices. As a way to attract orders from brokers, some regional exchanges or third market makers will pay your broker for routing your order to that exchange or market maker—perhaps a penny or more per share for your order. This is called "payment for order flow."

2. For a stock that trades in an over-the-counter (OTC) market, broker may send the order to a market maker.

3. Broker may route an investor order especially a "limit order" to an electronic communications network (ECN) that automatically matches buy and sell orders at specified prices. A "limit order" is an order to buy or sell a stock at a specific price.

4. Broker may decide to send the order to another division of broker's firm to be filled out of the firm's own inventory. This is called "internalization." In this way, the broker's firm may make money on the "spread" which is the difference between the purchase price and the sale price.

*Note:

While trade execution is usually seamless and quick, it does take time. And prices can change quickly, especially in fast-moving markets. Because price quotes are only for a specific number of shares, investors may not always receive the price they saw on their screen or the price their broker quoted over the phone. By the time order reaches the market, the prices could be slightly or very different.

Further, an order can be placed by the investor in various ways such as:

1. Market Order: An instruction by an investor to a broker to buy or sell stock shares, bonds, or other assets at the best available price in the current financial market.

2. Limit Order: A limit order is a type of order to purchase or sell a security at a specified price or better. For buy limit orders, the order will be executed only at the limit price or a lower one, while for sell limit orders, the order will be executed only at the limit price or a higher one.

3. Fill or Kill (FOK) and All or None (AON): Both buy and sell orders can be additionally constrained. Two of the most common additional constraints are fill or kill (FOK) and all or none (AON). FOK orders are either filled completely on the first attempt or canceled outright, while AON orders stipulate that the order must be filled with the entire number of shares specified, or not filled at all. If it is not filled, it is still held on the order book for later execution.

4. Stop Order: A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price. Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short. A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.

5. Stop-Limit Order: A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better). The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.

6. Trailing Stop Order: A trailing stop order is a stop or stop limit order in which the stop price is not a specific price. Instead, the stop price is either a defined percentage or dollar amount, above or below the current market price of the security (“trailing stop price”). As the price of the security moves in a favourable direction the trailing stop price adjusts or “trails” the market price of the security by the specified amount. However, if the security’s price moves in an unfavourable direction the trailing stop price remains fixed, and the order will be triggered if the security’s price reaches the trailing stop price.

7. Trailing Stop Limit Order: A trailing stop limit order allows an investor to set a trigger delta, which is how much the market price could fall before investor want to sell, or rise before investor want to buy. Investor can specify this as a percentage or a currency amount.

3. Trade Capture:

Trade capture is a process to book a transaction into a front-office trading system, such as inputting all trade details in the official book of record system, linking all reference data, and calculating profit and loss. The details recorded by front office personnel following trade execution are typically limited to a few essential pieces of information of a trade such as:

  • trading book.

  • trade date.

  • trade time.

  • value date.

  • operation.

  • quantity.

  • security.

  • price.

  • counterparty.

4. Risk Management Team:

In order to determine whether the order fits within the risk management parameters, risk managers in the financial services providers now conduct checks and calculations before the trade can move to the next step. In determining whether the trade is safe to make, one of the things they look at is whether or not the investor placing the order has sufficient capital to cover the security and limits.

5. Trade Enrichment:

Trade Enrichment is the process of applying relevant information to the trade that is necessary to settle the trade correctly. In an automated environment, trade enrichment can be primarily achieved from the static data repository. If any static data items are missing, the trade is treated as an exception with processing halted until the necessary information is added to the static data repository. Trade enrichment steps are:

1. Cash value Calculations: For nearly all trades that a financial services provided needs to manage and process, it is necessary to calculate the cash value in order to know the cash cost to pay upon receipt of securities from counterparties, and cash proceeds to receive when delivering securities to counterparties.

2. Selection of Custodian Details: Refers to the selection of the relevant custodian details for both the trading company and the counterparty.

3. Counterparty Trade Confirmation Requirements: Meaning, issue a trade confirmation by financial service providers to its institutional clients, as part of the service it offers to those clients.

4. Determining the Method of Transaction Reporting: Meaning transaction reporting to the regulators by the financial services provider depends on the securities it is dealing.

5. Method of Transmission of Settlement Instructions: Meaning transmission of settlement instructions via Telex or Swift.

6. Trade Validation:

A trade validation in actual is a final check of the data contained within a fully enriched trade. A Trade Validation should be performed to confirm that static data items, including trading book, security and counterparty, are known, and that the quantity is in accordance with the information held within static data. Where this check reveals a problem (e.g. counterparty not known), this should be highlighted and treated as an ‘exception’, requiring corrective action; this will have the impact of temporarily halting operational processing of the trade.

7. Trade Agreement:

Trade agreement is achieved through the issuance of outgoing trade confirmations to the counterparty, the receipt of incoming trade confirmations from the counterparty, followed by trade matching, followed by counterparties verify and affirm the details of the trade before submitting it for settlement.

8. Settlement Instructions: After trade confirmations messages, the financial services provider generates settlement instructions to the custodian. If a settlement instruction is not issued by the Financial Services Provider, trade settlement would not take place, and this is very likely to cause a direct monetary loss to the Financial Services Provider.

Settlement of individual trades occurs in one of two ways:

1. Delivery versus Payment basis: DvP is the simultaneous and irreversible exchange of securities and cash; this is a term that is used throughout the securities industry. Where trades are due to settle on a DvP basis, it is normal to issue a single settlement instruction to the relevant custodian, requesting the custodian to deliver securities versus payment, or to receive securities versus payment.

2. Free of Payment: Where the movement of securities and cash between buyer and seller is disassociated, settlement is said to occur on an FoP basis; this is the non-simultaneous exchange of securities and cash. For FoP settlement, it is normal for two settlement instructions to be generated.

Financial Services provider typically wish to settle every trade on a DvP basis. Also, for settlement instructions sending and receiving instruction is done using SWIFT. Further, Once a trade has settled at the custodian, the financial services provider updates its internal books and records immediately, with the detail of securities and/or cash movements.

13. Trade Life Cycle

1. Sales Stage:

Marketing persons from financial services provider such as investment banks, brokers and dealers introduce various financial products and vehicles to clients. Investors or institutional fund managers survey the market and find the most suitable and competitive products and open an account with the financial services provider.

2. Placing a Trade and Execution:

Placing a trade means an order or instructions given by the investors or customer of a financial services provider such as a broker firm to execute a trade. The execution of an order takes place when a filled instruction copy is received from the investor and financial services provider agrees to carry it out. Trade execution happens by noting the following:

Instructions type: buy or sell; a specific quantity of; a specific security. And will contain a number of features that are relevant to the price, including:

Limit—a price is specified, meaning, when buying, pay no more than the stated price when selling, accept no less than the stated price.

At Best—at the best available price, also known as an At Market Order and

Stop Loss—sell if and when the market price falls to the stated price

and a number of time related features, such as:

Fill or Kill—complete the entire order in full, or reject it immediately, without partial execution

Good Till Cancelled—the order remains open until it is executed, or the order is cancelled by the client, also known as an Open Order.

Investors who trade through online brokerage accounts do not have a direct connection to the securities markets. When investors push the order, the order is sent over the internet to the investor's broker, who in turn decides which market to send it to, for execution. A similar process occurs when investors calls the broker to place a trade. Brokers generally have a choice of markets to execute investors trade in the following manner:

1. For a stock that is listed on an exchange, broker may direct the order to that exchange, to another exchange (such as a regional exchange), or to a firm called a "third market maker." A "third market maker" is a firm that stands ready to buy or sell a stock listed on an exchange at publicly quoted prices. As a way to attract orders from brokers, some regional exchanges or third market makers will pay your broker for routing your order to that exchange or market maker—perhaps a penny or more per share for your order. This is called "payment for order flow."

2. For a stock that trades in an over-the-counter (OTC) market, broker may send the order to a market maker.

3. Broker may route an investor order especially a "limit order" to an electronic communications network (ECN) that automatically matches buy and sell orders at specified prices. A "limit order" is an order to buy or sell a stock at a specific price.

4. Broker may decide to send the order to another division of broker's firm to be filled out of the firm's own inventory. This is called "internalization." In this way, the broker's firm may make money on the "spread" which is the difference between the purchase price and the sale price.

*Note:

While trade execution is usually seamless and quick, it does take time. And prices can change quickly, especially in fast-moving markets. Because price quotes are only for a specific number of shares, investors may not always receive the price they saw on their screen or the price their broker quoted over the phone. By the time order reaches the market, the prices could be slightly or very different.

Further, an order can be placed by the investor in various ways such as:

1. Market Order: An instruction by an investor to a broker to buy or sell stock shares, bonds, or other assets at the best available price in the current financial market.

2. Limit Order: A limit order is a type of order to purchase or sell a security at a specified price or better. For buy limit orders, the order will be executed only at the limit price or a lower one, while for sell limit orders, the order will be executed only at the limit price or a higher one.

3. Fill or Kill (FOK) and All or None (AON): Both buy and sell orders can be additionally constrained. Two of the most common additional constraints are fill or kill (FOK) and all or none (AON). FOK orders are either filled completely on the first attempt or canceled outright, while AON orders stipulate that the order must be filled with the entire number of shares specified, or not filled at all. If it is not filled, it is still held on the order book for later execution.

4. Stop Order: A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price. Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short. A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.

5. Stop-Limit Order: A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better). The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.

6. Trailing Stop Order: A trailing stop order is a stop or stop limit order in which the stop price is not a specific price. Instead, the stop price is either a defined percentage or dollar amount, above or below the current market price of the security (“trailing stop price”). As the price of the security moves in a favourable direction the trailing stop price adjusts or “trails” the market price of the security by the specified amount. However, if the security’s price moves in an unfavourable direction the trailing stop price remains fixed, and the order will be triggered if the security’s price reaches the trailing stop price.

7. Trailing Stop Limit Order: A trailing stop limit order allows an investor to set a trigger delta, which is how much the market price could fall before investor want to sell, or rise before investor want to buy. Investor can specify this as a percentage or a currency amount.

3. Trade Capture:

Trade capture is a process to book a transaction into a front-office trading system, such as inputting all trade details in the official book of record system, linking all reference data, and calculating profit and loss. The details recorded by front office personnel following trade execution are typically limited to a few essential pieces of information of a trade such as:

  • trading book.

  • trade date.

  • trade time.

  • value date.

  • operation.

  • quantity.

  • security.

  • price.

  • counterparty.

4. Risk Management Team:

In order to determine whether the order fits within the risk management parameters, risk managers in the financial services providers now conduct checks and calculations before the trade can move to the next step. In determining whether the trade is safe to make, one of the things they look at is whether or not the investor placing the order has sufficient capital to cover the security and limits.

5. Trade Enrichment:

Trade Enrichment is the process of applying relevant information to the trade that is necessary to settle the trade correctly. In an automated environment, trade enrichment can be primarily achieved from the static data repository. If any static data items are missing, the trade is treated as an exception with processing halted until the necessary information is added to the static data repository. Trade enrichment steps are:

1. Cash value Calculations: For nearly all trades that a financial services provided needs to manage and process, it is necessary to calculate the cash value in order to know the cash cost to pay upon receipt of securities from counterparties, and cash proceeds to receive when delivering securities to counterparties.

2. Selection of Custodian Details: Refers to the selection of the relevant custodian details for both the trading company and the counterparty.

3. Counterparty Trade Confirmation Requirements: Meaning, issue a trade confirmation by financial service providers to its institutional clients, as part of the service it offers to those clients.

4. Determining the Method of Transaction Reporting: Meaning transaction reporting to the regulators by the financial services provider depends on the securities it is dealing.

5. Method of Transmission of Settlement Instructions: Meaning transmission of settlement instructions via Telex or Swift.

6. Trade Validation:

A trade validation in actual is a final check of the data contained within a fully enriched trade. A Trade Validation should be performed to confirm that static data items, including trading book, security and counterparty, are known, and that the quantity is in accordance with the information held within static data. Where this check reveals a problem (e.g. counterparty not known), this should be highlighted and treated as an ‘exception’, requiring corrective action; this will have the impact of temporarily halting operational processing of the trade.

7. Trade Agreement:

Trade agreement is achieved through the issuance of outgoing trade confirmations to the counterparty, the receipt of incoming trade confirmations from the counterparty, followed by trade matching, followed by counterparties verify and affirm the details of the trade before submitting it for settlement.

8. Settlement Instructions: After trade confirmations messages, the financial services provider generates settlement instructions to the custodian. If a settlement instruction is not issued by the Financial Services Provider, trade settlement would not take place, and this is very likely to cause a direct monetary loss to the Financial Services Provider.

Settlement of individual trades occurs in one of two ways:

1. Delivery versus Payment basis: DvP is the simultaneous and irreversible exchange of securities and cash; this is a term that is used throughout the securities industry. Where trades are due to settle on a DvP basis, it is normal to issue a single settlement instruction to the relevant custodian, requesting the custodian to deliver securities versus payment, or to receive securities versus payment.

2. Free of Payment: Where the movement of securities and cash between buyer and seller is disassociated, settlement is said to occur on an FoP basis; this is the non-simultaneous exchange of securities and cash. For FoP settlement, it is normal for two settlement instructions to be generated.

Financial Services provider typically wish to settle every trade on a DvP basis. Also, for settlement instructions sending and receiving instruction is done using SWIFT. Further, Once a trade has settled at the custodian, the financial services provider updates its internal books and records immediately, with the detail of securities and/or cash movements.

14. Novation

Novation is the process by which the original contract is ended and replaced with another, under which a third party takes up rights and obligations duplicating those of one of the parties to the original contract. This means that the original party transfers both the benefits and burdens under the contract. The benefits could be in the form of money or the benefit of a service, while burdens are what the party is obliged to do in order to receive the benefits, for example, payment for a service or goods, or the performance of a service. Novation is a complex process, as all the parties involved (the original parties and the incoming party) have to sign the novation agreement. This is because while the benefits under a contract can be assigned without the other party’s consent, contractual obligations cannot be assigned without their consent. This means that the original party can only achieve this if both the the new party and the third party agree to a novation. After the contract is novated, the outgoing party and the remaining party usually release each other from any liability and claims in respect of the original agreement on or after the date the agreement was signed.

15. IPO Process

When considering an IPO, a private company should evaluate the pros and cons, as well as the motivations for going public. This evaluation process is best conducted in conjunction with an investment bank, which can assist the company in thinking through the key points. Advantages of going public:

a. Affords a company access to capital, both at the time of IPO and on an ongoing basis.

b. Once the company is public, the existing owners can monetize their holdings in an efficient fashion.

c. Subsequent to the IPO, research analysts will begin to write reports on the company, further raising its profile.

d. Once the company is public, it can use its publicly tradable common stock in whole or in part to acquire other companies in conjunction with, or instead of, raising additional capital.

e. Being a public company provides employees with the ability to monetize the value of their stock-based compensation, whether it is options or restricted stock.

Companies may take 6, 12, 18 or even 24 or more months to prepare for their initial public offerings (IPOs) before formally engaging underwriters and kicking off the actual transaction. Going public involves assembling a large and experienced team of professionals, including lawyers, underwriters (the investment bank that buys the shares from the company and resells them to the public), independent auditors. The underwriting syndicate consists of various banks, each having different roles and status within the syndicate. The lead investment banks are known as bookrunners because they run the order book for the offering once it is in its marketing phase. The company should carefully choose the lead bookrunners for the IPO because of the significant role that they play throughout the process. The lead bookrunners advise the company on all facets of the IPO process, assist the company in shaping its investment thesis. Bookrunners’ research analysts will also be involved in undertaking due diligence on the company and play an important role in providing an independent view on the company to investors during the roadshow. Oftentimes, the most senior banks are considered lead or active bookrunners, while more junior banks are considered passive bookrunners or co-managers. The co-managers’ research analysts will take part in all analyst diligence that is conducted, and they will also play an active role in discussing their views of the company with investors while the roadshow is ongoing.

The company will require the services of a number of service providers in connection with its IPO:

1. Financial printer and data room provider: The company will need to appoint a financial printer to typeset and format its registration statement, oversee the submission of it to the securities exchange electronically and process subsequent changes to the registration statement resulting from securities exchange comments and other updates. The financial printer is also likely to provide virtual data room services to the company, enabling documents required for the due diligence process to be uploaded and viewed electronically by the working group.

2. Transfer agent: To list its stock on the Stock Exchange.

3. Electronic roadshow provider: Companies undertaking an IPO make an electronic roadshow available for both institutional and retail investors.

* Note: The roadshow is a sales pitch or promotion made by the underwriting firm and a company's management team to potential investors before going public.

An entity making an offering of securities registered with the securities exchange must file a registration statement and distribute a prospectus in connection with the offering. The registration statement and prospectus must contain financial statements and other financial information regarding the financial condition of the company and the results of its operations. The Securities Act or related rules and regulations set out the requirements through several forms for registration. These forms specify the information that must be disclosed under Regulations. Audited annual financial statements required to be included in the registration statement.

Phases of IPO's:

Week 1:

Organizational Meeting: All key members of the IPO working group meet to discuss the offering, including timing, key tasks and roles and responsibilities for the IPO process. The lead bookrunners typically prepare an organizational book that details the aforementioned items. During this meeting, the CEO, CFO, general counsel and other key executives typically provide an overview of the company, to ensure the working group has a good understanding of the company’s business, financial position and any key issues affecting it, as well as clarity on the critical path for execution of the IPO.

Weeks 2 to 5:

a. Registration statement drafting:

The registration statement is the principal document for submission to Security exchange. The drafting of the registration statement is a collaborative process among the company, the underwriters (typically led by the lead bookrunners), the company’s and underwriters’ counsel and the company’s auditors.

b. Due diligence:

The purpose of due diligence is twofold: first, and most importantly, to ensure the accuracy and completeness of the company’s registration statement; second, to protect the underwriters (and certain other offering participants) against liability arising in connection with any material misstatements and/or omissions in the offering disclosure. Due diligence is conducted by all members of the working group and is iterative in nature, continuing right up to closing of the IPO, though it should be substantially complete by the time of the initial filing of the registration statement. The underwriters and their counsel will conduct extensive business, financial and accounting due diligence on the company, focusing primarily on the company’s operations, procedures, financials (both historical and prospective), competitive position and business strategy, as well as on the management team and key board members.

c. Legal and other documentation:

The company’s and underwriters’ counsel will work with the underwriters, the company and the auditors to draft and complete the following documentation:

  • Underwriting agreement;

  • Lock-up agreements for existing shareholders (typically signed before filing of the registration statement);

  • Legal opinions;

  • Comfort letter; and

  • Press releases announcing the filing (optional), launch and pricing of the transaction.

d. Determining listing venue:

The company, with the assistance of the lead bookrunners, should determine whether it is eligible to list on which exchange, hold discussions with the exchange and reserve a ticker symbol.

Week 6:

a. Valuation update with the lead bookrunners:

It is prudent to hold periodic valuation updates with the lead bookrunners, particularly as market conditions shift and as the company achieves key milestones throughout the IPO process. This ensures that all parties are aligned on valuation expectations.

b. Legal and other documentation:

Continue drafting and negotiating legal documentation and comfort letter.

c. Equity research analyst briefing:

The underwriters’ or syndicate’s equity research analysts also conduct due diligence on the company, with a particular focus on the business and financials.

d. Underwriter internal approvals:

Prior to filing the initial draft registration statement with the securities exchange, the underwriters will typically need to clear internal committees. This involves presenting the company to an internal committee, a review of the draft registration statement disclosure and a discussion of any issues that came to light during the due diligence process.

e. Submission of draft registration statement to the Securities Exchange:

To commence the process of the Security exchange's review of the registration statement, the company must file it together with various exhibits.

Weeks 7 to 8:

a. Roadshow presentation and marketing strategy:

While the IPO working group awaits comments from the securities exchange on the draft registration statement, it is prudent to further develop the marketing story for the IPO roadshow. The lead bookrunners will generally spearhead this process, while working closely with the company to create an impactful slide deck to be shown to investors during the roadshow.

b. Legal and other documentation:

Continue drafting and negotiating legal documentation and comfort letter.

Weeks 9 to 13:

a. Receiving and addressing Security Exchange's comments:

The security exchange takes approximately 30 days to complete its initial review of the draft registration statement. The securities exchange will respond to the company and its counsel via a formal comment letter in which it makes certain observations on the draft disclosure and invites the company to address these by making revisions and filing a series of amendments.

b. Agree on offering structure:

The company, in conjunction with the lead bookrunners, should determine the appropriate proceeds to raise in the IPO in order to be well capitalized after the IPO, taking into account its strategic goals, as outlined in the registration statement.

c. Valuation and price range discussions:

Continue periodic valuation discussions with the underwriters and formulate a preliminary price range to be provided confidentially to the securities exchange as an indication of what is to be expected when the offering is launched.

d. Agree on marketing strategy:

The company and the lead bookrunners decide on ideal timing, the length of the roadshow and which investors to target as potential buyers of the IPO.

Weeks 14 to 15:

a. Registration statement and other documentation:

Having cleared all Securities exchange comments and amended the registration statement to reflect any stock split and the offering price range, finalize all other documentation, including the underwriting agreement and comfort letter, and launch the press release.

Weeks 16 to 17:

a. Launch IPO:

File an amendment to the registration statement with price range (the so-called red herring). Conduct management presentations to the underwriters’ equity salesforces and commence the roadshow, typically consisting of up to seven and eight days of investor meetings. Pricing and closing. After building a book of demand, the lead bookrunners will agree on the offering price with the company and shareholders, execute the underwriting agreement and allocate the IPO to investors. The following day, the company begins publicly trading on the Stock exchange, rings the opening bell and hosts other key marketing events associated with being a public company. Two business days later, the IPO closes, at which point stock is delivered to investors against payment of the offering price, and various legal opinions are delivered by counsel.

16. Leveraged Buy-Out (LBO)

Private Equity firms are experts in purchasing companies and make big money. They do a leveraged buyout and acquire a company using a relatively small portion of equity and a relatively large portion of outside debt financing. In a typical leveraged-buyout transaction, the private equity firm buys majority control of an existing or mature firm. This arrangement is distinct from venture capital firms that typically invest in young or emerging companies, and typically do not obtain majority control.

A private equity firm is mostly organized as a partnership firm (usually a Limited Partnership Structure in which the general partners manage the fund and the limited partners provide most of the capital). Private equity funds are “closed-end” vehicles in which investors commit to provide a certain amount of money to pay for investments in companies as well as management fees to the private equity firm. The fund typically has a fixed life, usually ten years, but can be extended for up to three additional years. The private equity firm normally has up to five years to invest the fund’s capital committed into companies, and then has an additional five to eight years to return the capital to its investors. After committing their capital, the limited partners have little say in how the general partner deploys the investment funds, as long as the basic covenants of the fund agreement are followed. The general partner earns an annual management fee, usually a percentage of capital committed, and then, as investments are realized, a percentage of capital employed. Second, the general partner earns a share of the profits of the fund, referred to as “carried interest,” that almost always equals 20 percent. Finally, some general partners charge deal and monitoring fees to the companies in which they invest.

In a typical private equity transaction, the private equity firm agrees to buy a company. If the company is public, the private equity firm typically pays a premium of 15 to 50 percent over the current stock price. The buyout is typically financed with 60 to 90 percent debt hence the term, leveraged buyout. The debt almost always includes a loan portion that is senior and secured and is arranged by a bank or an investment bank. Usually, institutional investors purchase a large fraction of the senior and secured loans. The debt in leveraged buyouts also often includes a junior, unsecured portion that is financed by either high-yield bonds or “mezzanine debt” (that is, debt that is subordinated to the senior debt). The private equity firm invests funds from its investors as equity to cover the remaining 10 to 40 percent of the purchase price. The new management team of the purchased company typically also contributes to the new equity, although the amount is usually a small fraction of the equity dollars contributed. Private equity firms apply three sets of changes to the firms in which they invest, which we categorize as financial, governance, and operational engineering. First, private equity firms pay careful attention to management incentives in their portfolio companies. They typically give the management team a large equity upside through stock and options. The second key ingredient is leveraged borrowing that is done in connection with the transaction. Leverage creates pressure on managers not to waste money because they must make interest and principal payments. This pressure reduces the “free cash flow” problems. Third, governance engineering refers to the way that private equity investors control the boards of their portfolio companies and are more actively involved in governance than public company boards.

Because most private equity funds have a limited contractual lifetime, investment exits are an important aspect of the private equity process. The most common route is the sale of the company to a strategic buyer or a sale to another private equity fund in a secondary leveraged buyout or Initial public offerings, where the company is listed on a public stock exchange and the private equity firm can subsequently sell its shares in the public market.

17. Credit Default Swap

Credit Default Swap (/CDS) is a derivative contract or an insurance against credit risk or simply a swap of credit default i.e., transfer of the credit exposure from one party to another party. In a standard CDS contract one party purchases credit protection from another party, to cover the loss of the face value of an asset following a credit event (A credit event may mean a bankruptcy, a default, a debt restructuring, a moratorium). This protection lasts until some specified maturity date where, the protection buyer makes a regular stream of payments, known as the premium, to the protection seller. Buyers of CDS protection can be Commercial banks and other lenders while insurance companies, dealers, financial guarantors, and credit derivative product companies are protection sellers. A bank, for example, may hedge its risk that a borrower may default on a loan by entering into a CDS contract as the buyer of protection. If the loan goes into default, the proceeds from the CDS contract will cancel out the losses on the underlying debt.

For example, Rak Bank has bought a $25 million bond from company Al-Ameen. Rak Bank has now exposure to Al-Ameen. Rak Bank after a period of time from the deal believes that Al-Ameen's prospects are declining, or let's say, Rak Bank wants to diversify its assets for a variety of tax or other reasons. Rak Bank does not want to sell the bond hence, to eliminate the credit risk of Al-Ameen it enters a CDS. Here, Rak Bank becomes a protection buyer, and let's say the protection seller is another Bank, say ADCB which is generally a CDS Dealer. The CDS market is a dealer market, so transactions take place through dealers, over the counter rather than on an exchange. Here you see the transaction happening is, in purchasing protection against Al-Ameen’s default, Rak Bank’s swap is with ADCB. The structure of the CDS is simple ADCB agrees to pay $25 million if Al-Ameen defaults, and Rak Bank agrees to make an annual or quarterly premium payment to ADCB. If Al-Ameen's is good credit, the premium will be small, correspondingly the premium would be larger when the market perceives greater credit risk in Al-Ameen. Under the typical CDS contract, Rak Bank is entitled to request collateral from ADCB. It is not mandatory that Rak Bank has to enter into a CDS for the full amount of $25 Million, it can also enter into a CDS contract for say $10 million. It's ADCB's choice that it can go for an offsetting hedge by entering into other CDS with another insurance company say Cedar Insurance, and Cedar Insurance posts collateral with ADCB. The CDS is dangerous for the reason that the transfer of Rak Banks’s risk to ADCB and then to Cedar Insurance is a vicious chain.

The credit default swap market is generally divided into three sectors:

1. Single-credit CDS referencing specific corporates, bank credits, and sovereigns.

2. Multi-credit CDS, which can reference a custom portfolio of credits agreed upon by the buyer and seller,

3. CDS index, a basket of single issuer CDS's.

18. ISIN and CUSIP

ISIN and CUSIP codes are some of the most well-known securities identification numbers in the world and are especially used in finance to trade, sell and buy.

An ISIN or International Securities Identification Number (ISIN) is an alphanumeric code that contains 12 characters. The ISIN code has a country code composed of two letters, such as “US” for the United States, or “GB” for Great Britain, a national security identifier composed of nine alphanumeric characters (such as “123455689”), and one check digit. Its purpose is for the uniform identification of securities that are traded and settled. It is used on shares, options, debt security, derivatives, and futures trading. It is being used in most parts of the world, especially in Europe.

The Committee on Uniform Security Identification Purposes (CUSIP), on the other hand, is a North American alphanumeric code that has nine characters used for securities trade clearing and settlement. It is used primarily in the United States of America. It contains the base which is the first six characters that identify the issuer and are assigned in alphabetical sequence, the seventh and eighth characters that identify the issue, and the ninth character which is the check digit. The check digit is calculated by converting letters to numbers according to their position in the alphabet. All second digits are then multiplied by two to come up with the CUSIP check digit. CUSIPs are also assigned to offshore entities in over 30 jurisdictions (such as Cayman funds, BVI funds, etc). Those corporations that are conducting an initial public offering typically in a North American exchange are also often required to register a CUSIP number. A CUSIP number is assigned to each issue and may need to be changed when there is a Corporate Action.


19. Syndicated Loans

In a syndicated loan, two or more banks agree jointly to make a loan to a borrower. Every syndicate member has a separate claim on the debtor, although there is a single loan agreement contract. The creditors can be divided into two groups. The first group consists of senior syndicate members and is led by one or several lenders, typically acting as mandated arrangers, arrangers, lead managers, or agents. These senior banks are appointed by the borrower to bring together the syndicate of banks prepared to lend money at the terms specified by the loan. Senior banks may have several reasons for arranging syndication. It can be a means of avoiding excessive single-name exposure, in compliance with regulatory limits on risk concentration, while maintaining a relationship with the borrower. Or it can be a means to earn fees, which helps diversify their income. In essence, arranging a syndicated loan allows them to meet borrowers’ demand for loan commitments without having to bear the market and credit risk alone. The syndicate is formed around the arrangers often the borrower’s relationship banks who retain a portion of the loan and look for junior participants. The junior banks, typically bearing manager or participant titles, form the second group of creditors. Their number and identity may vary according to the size, complexity, and pricing of the loan as well as the willingness of the borrower to increase the range of its banking relationships. For junior banks, participating in a syndicated loan may be advantageous for several reasons. These banks may be motivated by a lack of origination capability in certain types of transactions, geographical areas or industrial sectors, or indeed a desire to cut down on origination costs. While junior participating banks typically earn just a margin and no fees, they may also hope that in return for their involvement, the client will reward them later with more profitable business, such as treasury management, corporate finance or advisory work .

As well as earning a spread over a floating rate benchmark (typically Libor) on the portion of the loan that is drawn, banks in the syndicate receive various fees. The arranger and other members of the lead management team generally earn some form of upfront fee in exchange for putting the deal together. This is often called a praecipium or arrangement fee. The underwriters similarly earn an underwriting fee for guaranteeing the availability of funds. Other participants (those at least on the “manager” and “co-manager” level) may expect to receive a participation fee for agreeing to join the facility, with the actual size of the fee generally varying with the size of the commitment. The most junior syndicate members typically only earn the spread over the reference yield. Once the credit is established and as long as it is not drawn, the syndicate members often receive an annual commitment or facility fee proportional to their commitment. The agent bank typically earns an agency fee, usually payable annually, to cover the costs of administering the loan. Loans sometimes incorporate a penalty clause, whereby the borrower agrees to pay a prepayment fee or otherwise compensate the lenders in the event that it reimburses any drawn amounts prior to the specified term. Secondary Loan Trading or the SLT is primarily concerned with the trading of syndicated loans in the secondary market. The participants in a syndication deal can carry out trading operations on the loan, once the syndication deal is closed and allocated. Brokers also can get involved in the trading process.

19. Total Return Swap

A Total Return Swap (TRS) is an agreement between two parties that exchanges the total return from a financial asset between them. TRS is credit risk management tool used by banks to manage their credit risk exposure. In short, TRS is a swap agreement in which the total return of a bank loan or credit-sensitive security is exchanged for some other cash flow, usually tied to Libor or some other loan or credit-sensitive security.

The TRS trade itself can be to any maturity term i.e., it need not match the maturity of the underlying security. In a TRS, the total return from the underlying asset is paid over to the counterparty in return for a fixed or floating cash flow. This makes it slightly different to other credit derivatives such as credit default swaps, as the payments between counterparties to a TRS are connected to changes in the market value of the underlying asset, as well as changes resulting from the occurrence of a credit event. So, in other words, TRS cash flows are not solely linked to the occurrence of a credit event; in a TRS the interest-rate risk is also transferred. The transaction enables the complete cash flows of a bond to be received without the recipient actually buying the bond, which makes it a synthetic bond product and therefore a credit derivative. An investor may wish to receive such cash flows synthetically for tax, accounting, regulatory capital, external audit or legal reasons.

20. Brokerage Accounts

A brokerage account is an investment account that allows an investor to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and Exchange Traded Funds. Brokerage accounts services primarily involve assisting investors with the purchase and sale of securities based on instructions. These accounts have a transaction-based cost structure and investors retain the final investment decision on all transactions in the account.

The core services that banks provide under brokerage accounts are:

  • Holding securities and cash.

  • Executing, clearing and settling transactions.

  • Collecting and processing dividends.

  • Issuing buy and sell confirmations and client statements.

  • Looking after the various details associated with the clearing and carrying of accounts.

In exchange for brokerage services, investor generally pay a commission or other charge for each transaction, and other applicable fees. For example, investor generally pay a commission for each equity transaction, a markup/mark-down for bond transactions and a sales charge for mutual fund transactions. Therefore, in a brokerage account, investors total costs will generally increase or decrease as a result of the frequency of transactions in the account and the type of securities investor purchase.

Types of Brokerage Accounts:

a. A cash account is a type of brokerage account in which the investor must pay the full amount for securities purchased. In a cash account, investors are not allowed to borrow funds from broker to pay for transactions in the account.

b. A margin account is a type of brokerage account in which brokerage firm can lend investor money to buy securities, with the securities in investor's portfolio serving as collateral for the loan. As with any other loan, investor will incur interest costs when investor buy securities on margin.

20. Brokerage Accounts

A brokerage account is an investment account that allows an investor to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and Exchange Traded Funds. Brokerage accounts services primarily involve assisting investors with the purchase and sale of securities based on instructions. These accounts have a transaction-based cost structure and investors retain the final investment decision on all transactions in the account.

The core services that banks provide under brokerage accounts are:

  • Holding securities and cash.

  • Executing, clearing and settling transactions.

  • Collecting and processing dividends.

  • Issuing buy and sell confirmations and client statements.

  • Looking after the various details associated with the clearing and carrying of accounts.

In exchange for brokerage services, investor generally pay a commission or other charge for each transaction, and other applicable fees. For example, investor generally pay a commission for each equity transaction, a markup/mark-down for bond transactions and a sales charge for mutual fund transactions. Therefore, in a brokerage account, investors total costs will generally increase or decrease as a result of the frequency of transactions in the account and the type of securities investor purchase.

Types of Brokerage Accounts:

a. A cash account is a type of brokerage account in which the investor must pay the full amount for securities purchased. In a cash account, investors are not allowed to borrow funds from broker to pay for transactions in the account.

b. A margin account is a type of brokerage account in which brokerage firm can lend investor money to buy securities, with the securities in investor's portfolio serving as collateral for the loan. As with any other loan, investor will incur interest costs when investor buy securities on margin.

21. Auction Rate Securities

Auction rate securities (ARS) are debt or preferred equity securities that have interest rates that are periodically re-set through auctions, typically every 7, 14, 28, or 35 days. ARS are generally structured as bonds with long-term maturities (20 to 30 years) or preferred shares (issued by closed-end funds). Municipalities and public authorities, student loan providers and other institutional borrowers use ARS to raise funds. Auction Rate Securities (ARS) are debt securities that are sold through a Dutch auction. A Dutch auction is a public offering auction structure in which the price of the offering is set after taking in all bids and determining the highest price at which the total offering can be sold. In a Dutch auction, investors place a bid for the amount they are willing to buy in terms of quantity and price. In this type of auction, an ARS is sold at an interest rate that will clear the market at the lowest yield possible. This ensures that all bidders on an ARS receive the same yield on the debt issue. Typically, the minimum investment in ARS is $25,000. ARS are auctioned at par. Thus, the return on the investment to the investor and the cost of financing to the issuer between auction dates is determined by the interest rate or dividend yield set through the auctions.

The issuer of each ARS selects one or more broker-dealers to underwrite the offering and/or manage the auction process. Investors can only access the auctions by submitting orders to buy, hold or sell ARS through these selected broker-dealers. The issuer also selects an auction agent to collect the orders and determine the clearing rate for the ARS. The selected broker-dealers submit all orders to the auction agent by the time specified in the auction procedures.

Before the start of an auction, the broker-dealer may, in its discretion, make available to existing holders and potential holders in good faith judgment a range of likely clearing rates for the auction based on market and other information. This is typically referred to as Price Talk. Price Talk is not a guarantee, and existing holders and potential holders are free to use it or ignore it. broker-dealer may occasionally update and change the Price Talk based on changes in issuer credit quality or other economic factors that are likely to result in a change in interest rate levels.

Each particular auction has a formal time deadline by which all bids must be submitted by broker-dealer to the auction agent. This deadline is called the “Submission Deadline.” To provide sufficient time to process and submit customer bids to the auction agent before the Submission Deadline, broker-dealer imposes an earlier deadline called the “Internal Submission Deadline” by which bidders must submit bids to broker-dealer. The Internal Submission Deadline is subject to change by broker-dealer. Investors in ARS may submit the following types of orders to broker-dealers:

a “hold” order, when a current investor will keep the securities at the rate at which the auction clears;

a “deemed hold” order, which is the default order for current investors who cannot be contacted (i.e., the order that is entered for a current holder if the holder takes no action), where a current investor will keep the securities at the rate at which the auction clears;

a “hold-at-rate” bid, where a current investor may keep the securities if the clearing rate is at or above the rate specified by the investor;

a “sell” order, where a current investor wishes to sell the securities regardless of the clearing rate; or

a “buy” bid (sometimes referred to as a “new” bid), where a prospective investor, or a current investor who wishes to purchase additional securities, may buy securities if the clearing rate is at or above the rate specified by the investor.

Further, a failed auction is an auction during which the auction agent does not receive sufficient orders at or below the maximum rate (the “Maximum Rate”) to purchase all the ARS being sold and the rate on the ARS is set at the Maximum Rate. The Maximum Rate is the rate specified in the relevant documents and is often a multiple of reference rates, such as LIBOR or an index of Treasury securities, or a specified percentage rate. Holders may be disadvantaged if there is a failed auction because they are not able to exit their position through the auction.

21. Stock Symbol (/Ticker Symbol)

A stock symbol is an abbreviation used to identify publicly traded companies. When a company decides to go public, it will select the exchange to list on and then choose a unique stock symbol to differentiate itself from other companies on the exchange. They are also referred to as stock tickers or most commonly ticker symbols. The name stock ticker derives its meaning from the days when the symbols were used to transmit prices via ticker tape. The number of letters included in a stock symbol can vary from exchange to exchange. Tickers on the NASDAQ exchange are commonly four or five letters, while many other exchanges use between one and three letters. Most companies choose letters that correspond to their full name like Microsoft (MSFT), but some will choose a more memorable abbreviation, for example, Harley-Davidson uses the symbol of HOG meaning motorcycle. Identification of ticker is very important. For example, in 2013, due to all the hype around the IPO of Twitter, a large number of investors mistakenly invested in Tweeter Home Entertainment, which turned out to be a bankrupt electronics firm. The ticker of Twitter was TWTR, whereas that of the latter was TWTRQ causing confusion. Companies sometimes choose Ticker which indicate the business they do or to relate to a community. Example, Internet America, an ISP, broke out the pocket protectors when deciding to brand itself with (GEEK). Dynamic Materials went (BOOM), a reference to its "explosive metalworking" segment. Natus Medical, which specializes in pediatric and newborn healthcare products, went with (BABY). Auctioneer Sotheby's chose the apropos (BID). Harris & Harris Group is (TINY), a name meant to remind you that that the venture capital firm specializes in nanotechnology. Piano maker Steinway chose (LVB) in honor of Ludwig van Beethoven.

22. Trading Desk

A trading desk or dealing desk is where banks execute financial assets and financial instruments like forex, equities, options, commodities. Dealing desk brokers does such trading. They profit by buying at lower prices and selling at higher prices, and by taking advantage of the spreads between the bid and ask price. In most cases, dealing desk brokers keep trades safely within their own liquidity pools and do not require external liquidity providers. Types of trading desks are:

The equity trading desk of an investment bank can cover anything from equity sales, equity trading, and derivatives trading.

Fixed Income, Currencies, and Commodities (FICC) includes a huge range of different desks and is harder to generalize than Equity Trading. FICC provides services to foreign exchange solutions to top-tier corporations, multinational companies and financial institutions, Interest rate solutions, and credit solutions.

Some banks have different trading desks for Foreign exchange, Commodity trading, and derivatives.

23. Alpha and Beta

Alpha is a term used in investing to describe an investment strategy to beat the market. For example, if a mutual fund returned 10% in a year in which the S&P 500 rose only 5%, that fund would have a higher alpha. Conversely, if the fund gained 10% in a year when the S&P 500 rose 15%, it would earn a lower alpha. The baseline measure for alpha is zero, which would indicate an investment performed exactly in line with its benchmark index. So in short, "Alpha of portfolio = Actual rate of return of portfolio – Benchmark Return". Alpha is one of the most important technical analysis tools used by investors to determine the profitability of an investment, as it reflects an accurate risk return. However, statistics suggest that a fund generating relatively higher yields is unlikely to do so at a later date, as share prices fluctuate in tune with their performance and adjust accordingly to reflect their real value.

Beta measures volatility, The term "beta" is simply a measure of a stock's sensitivity to the movement of the overall stock market. The beta of an individual stock is based on how it performs in relation to the index's beta. A stock with a beta of 1.0 indicates that it moves in tandem with the S&P 500. If a stock's performance has historically been more volatile than the market as a whole, its beta will be higher than 1.0. For example, a stock with a beta of 1.4 is 40% more volatile than the market. So if the S&P 500 rises 10%, a stock with a beta of 1.4 is expected to rise by 14%. Similarly, if the S&P 500 falls 10%, a stock with a beta of 1.4 is expected to fall by 14%. Meaning, the higher a stock's beta, the more volatile it is.

23. Asset Classes (Equity)

Asset Class Definition: An asset class is several assets having similar characteristics. The broad asset class categories are equities, fixed income, cash and cash equivalents, real estate, commodities, and currencies. Let us check these asset classes in detail starting with Equity.

I. Equity: Equity is the ownership interest in a company or corporation. Equities are divided into:

a. Common Stock: A unit of ownership, typically carrying voting rights (usually one vote per share) that can be exercised in corporate decisions.

b. American Depositary Receipts (ADR): A negotiable certificate issued by a U.S. bank representing a specific number of shares of a foreign stock traded on a U.S. stock exchange. ADRs make it easier for Americans to invest in foreign companies, due to the widespread availability of dollar-denominated price information, lower transaction costs, and timely dividend distributions.

c. Global Depositary Receipts (GDR): A negotiable certificate held in the bank of one country representing a specific number of shares traded on an exchange of another country. Prices of GDRs are often close to values of related shares, but they are traded and settled independently of the underlying share. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. These instruments are typically used by companies from emerging markets.

d. Exchange-Traded Funds (ETF): An open-ended investment fund or trust that holds portfolios of securities, and it is designed to track certain indexes or baskets of stocks. Unlike a unit trust, exchange-traded funds are bought and sold on an exchange, rather than through a fund manager or their distributors.

e. Preferred Shares: Preferred shares is a class of share capital that carries a fixed return and ranks ahead of common stock in the order of priority for the distribution of earnings and assets. Holders of preferred stock generally do not have voting rights or a claim on the residual earnings and assets of a corporation, in contrast to common stockholders.

24. Asset Classes (Fixed Income)

II. Fixed Income: Any type of investment that yields a regular (fixed) payment. Types of fixed income asset classes are:

a. Asset Backed Securities: A bond or note backed by loans that are not first lien mortgages. Typical loans backing these securities are credit card receivables, auto loans manufactured-housing contracts and home-equity loans.

b. Collateralized Mortgage Obligation: A mortgage backed, investment-grade bond that separates mortgage pools into different maturity classes. CMOs are backed by mortgage backed securities with a fixed maturity. They can eliminate the risks associated with prepayment because each security is divided into maturity classes that are paid off in order. As a result, they yield less than other mortgage backed securities. The maturity classes are called tranches, and they are differentiated by the type of return.

c. Factored Bonds: For certain fixed income products that pay principal, like mortgage-backed securities, factor is the number by which the original face value of the product decreases over time.

d. Fixed Rate Bonds/Notes: A bond or note who’s interest rate does not change during the entire term of the bond.

e. Treasury Securities: Treasury security is government debt. Treasury securities are the debt financing instruments of the government, and they are often referred to simply as Treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).

f. Mortgage Backed Securities: Is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans.

g. Agency Bonds: Agency debt is a security, usually a bond, issued by a government-sponsored agency. The offerings of these agencies are backed by the government, but not guaranteed by the government since the agencies are private entities. Some prominent issuers of agency securities are Student Loan Marketing Association (Sallie Mae), Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac).

h. Muni Bonds: A bond issued by a state, city, or local government. Municipalities issue bonds to raise capital for their day-to-day activities and for specific projects that they might be undertaking (usually pertaining to development of local infrastructure such as roads, sewerage, hospitals etc).

i. Perpetual/Undated Bonds: A perpetual bond, which is also known as a Perpetual or just a Perp, is a bond with no maturity date. Perpetual bonds pay coupons forever, and the issuer does not have to redeem them. Their cash flows are therefore that of a perpetuity. Examples of perpetual bonds are consols issued by the UK Government.

j. Corporate Bonds: A type of bond issued by a corporation. Corporate bonds often pay higher rates than government or municipal bonds, because they tend to be riskier. The bondholder receives interest payments (yield) and the principal. Generally, changes in interest rates are reflected in bond prices.

h. Debenture: In finance, a debenture is a long-term debt instrument used by governments and large companies to obtain funds. It is similar to a bond except the securitization conditions are different. A debenture is usually unsecured in the sense that there are no liens or pledges on specific assets.

i. Sovereign Bonds: A sovereign bond is a bond issued by a national government. The term usually refers to bonds issued in foreign currencies, while bonds issued by national governments in the country’s own currency are referred to as government bonds. For example, Bunds (German), Buoni del Tesoro Poliennali (BTP - Italian), Commonwealth Bond (Australian), Italian Government Bonds, Japanese Government Bonds (JGBs).

j. International Bonds: Bonds that are issued in a country by a non-U.S. entity. International bonds include Eurobonds, foreign bonds and global bonds.

k. Foreign Bonds: A bond that is issued in a domestic market by a foreign entity, in the domestic market’s currency. Types of foreign bonds include bulldog bonds, matilda bonds, and samurai bonds.

l. Eurobonds: A Eurobond is a bond that has been issued in one country’s currency but is traded outside of that country and in a different monetary system and regulatory system. Eurobonds are named after the currency they are denominated in. For example, Euroyen and Eurodollar bonds are denominated in Japanese yen and American dollars respectively.

m. Supranational Bonds: A debt security issued by a Supranational organization - an organization owned by or spanning several sovereign states and therefore is usually outside the control of any single national government. Supranational agencies like the European Investment Bank or the Asian Development Bank issue Supranational bonds.

n. Index Linked Bonds: A bond in which payment of income on the principal is related to a specific price index, often the Consumer Price Index. This feature provides protection to investors by shielding them from changes in the underlying index. The bond’s cash flows are adjusted to ensure that the holder of the bond receives a known real rate of return.

o. Euro Notes: The short-term version of the Eurobond, issued with floating rates and usually with maturities of less than six months.

p. Emerging Markets/Brady Bonds: Bonds that are issued by the governments of developing countries. Brady Bonds are some of the most liquid emerging market securities. They are named after former U.S. Treasury Secretary Nicholas Brady, who sponsored the effort to restructure emerging market debt instruments.

q. Legacy Currency Bonds: A bond still traded in its original currency of issue prior to moving to the Euro, settling in Euros today.

25. Asset Classes (Money Market)

III. Money Markets: The money market is the global financial market for short-term borrowing and lending. It provides short term liquid funding for the global financial system.

a. Bankers Acceptances: A short-term credit investment that is created by a non-financial firm and whose payment is guaranteed by a bank. Often used in importing and exporting, and as a money market fund investment.

b. Cash: Cash usually refers to money in the form of liquid currency, such as banknotes or coins.

c. Certificate of Deposit: Short- or medium-term, interest-bearing (payable at maturity), debt instrument offered by banks. CDs offer higher rates of return than most comparable investments, in exchange for tying up invested money for the duration of the certificate’s maturity.

d. Commercial Paper: Commercial paper is a money market security issued by large banks and corporations. It is generally not used to finance long-term investments but rather for purchases of inventory or to manage working capital.

e. Discounted Bonds: A bond which is sold at a price below its face value and returns its face value at maturity.

f. Eurodollar Certificate of Deposit: A Eurodollar CD is basically the same as a domestic CD, except that it’s the liability of a non-US bank. Because Eurodollar CDs are typically less liquid, they tend to offer higher yields.

g. Euro Commercial Paper: An unsecured, short-term loan issued by a bank or corporation in the international money market, denominated in a currency that differs from the corporation’s domestic currency.

h. Medium Term Notes: A Medium Term Note is a debt note that usually matures (is paid back) in 5-10 years, but the term may be as short as one year. They’re normally issued on a floating basis such as Euribor +/- basis points. When they are issued in euro they are “Euro Medium Term Notes”.

i. Repurchase Agreements: A repo (repurchase agreement) involves a borrower selling securities to another party at a fixed price, with an agreement to repurchase the securities at an agreed future date and price. It is also known as a repurchase agreement or an RP.

j. Reverse Repos: A purchase of securities with an agreement to resell them at a higher price at a specific future date. This is essentially just a loan of the security at a specific rate.

k. RVP/DVP Repos: Receive vs. Payment and Delivery vs. Payment is a process that involves the simultaneous delivery of all documents necessary to give effect to a transfer of securities in exchange for the receipt of the stipulated payment amount or vice versa.

l. Sell/Buy Back Repos: The spot sale and a forward repurchase of a security.

m. Tri-Party Repos: A Repo where a custodian bank or international clearing organization acts as an intermediary between the two parties to the Repo. The tri-party agent is responsible for the administration of the transaction including collateral allocation, marking to market, and substitution of collate administrative burden of bilateral Repos.

n: Treasury Bills: Treasury Bills mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity; instead, they are sold at a discount of the par value to create a positive yield to maturity.

26. Asset Classes (Entitlements)

IV. Entitlements: A type of security associated with a security purchase or holding that gives the privilege of further subscription to additional shares under certain market conditions.

a. Warrants: A warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is much higher than the stock price at time of issue. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.

b. Rights: The rights issue is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time.

27. Asset Classes (Derivatives)

V. Derivatives: In finance, “Derivatives are financial instruments whose price and value derive from the value of assets underlying them”. In other words, they are “financial contracts whose value derive from the value of underlying stocks, bonds, currencies, commodities, etc.”

a. Contracts for Difference (Synthetic Equity Swaps): A financial derivative contract involving an exchange of cash flows based on the market price movements of an underlying equity (or group of equities) in exchange for an agreed interest rate, thereby allowing an investor to take a position in a stock (or stocks) without taking physical ownership (or shorting) them.

b. Exchange Traded Options (listed options): An option traded on a regulated exchange where the terms of each option are standardized by the exchange. The contract is standardized so that underlying asset, quantity, expiration date and strike price are known in advance.

c. Exchange Traded Futures: Exchange-traded futures which are also known as “listed futures”. This is a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.

d. FX Forwards & NDFs: An FX forward is a foreign exchange contract which buys one currency and sells a different currency for future delivery (T+2+n). An NDF is a foreign exchange contract in which counterparties settle the difference in USD or EUR between the NDF contract rate and the prevailing spot rate on Fixing date (V-2).

e. FX Swaps: A set of 2 foreign exchange contracts, the first of which buys one currency and sells a different currency for immediate delivery while the second sells back the bought currency and buys back the sold currency for future delivery. When the dealt amounts in the 2 contracts are equal, the Swap is even; when they are not, the Swap is uneven.

28. Asset Classes (Others)

a. FX Spot: A foreign exchange contract which buys one currency and sells a different currency for immediate delivery (T+2).

b. Equity Linked Note: An Equity Linked Note (ELN) is a debt instrument, usually a bond, that differs from a standard fixed income security in that the final payout is based on the return of the underlying equity, which can be a single stock, basket of stocks or an equity index. A typical ELN is principal-protected, i.e. the investor is guaranteed to receive 100% of the original amount invested at maturity, but pays no interest.

c. Private Placements: A private placement is a direct private offering of securities to a limited number of sophisticated investors. It is the opposite of a public offering. Investors in privately placed securities include insurance companies, pension funds, mezzanine funds, stock funds and trusts. Securities issued as private placements include debt, equity, and hybrid securities.

d. Participatory Notes: Commonly known as P-Notes or PNs are instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the stock markets without registering themselves with the market regulator.

e. Crest Depository Interest: A CREST Depository Interest (/CDI) is a UK security that represents a stock traded on an exchange outside the UK. They offer a straightforward, cost-effective way to trade in a number of overseas stocks and are the main means of foreign dealing provided by a number of UK international stock brokers.

29. Green Bond

A “green bond” is differentiated from a regular bond by its label, which signifies a commitment to exclusively use the funds raised to finance or re-finance “green” projects, assets or business activities. Like any other bond, a green bond is a fixed-income financial instrument for raising capital from investors through the debt capital market. Typically, the bond issuer raises a fixed amount of capital from investors over a set period of time (the “maturity”), repaying the capital (the “principal”) when the bond matures and paying an agreed amount of interest (“coupons”) along the way.

Types of Green Bonds:

"Use of Proceeds" Bond: These bonds are earmarked for green projects where the same credit rating applies as issuer's other bonds example, Barclays Green Bond.

"Use of Proceeds" Revenue Bond": These bonds are earmarked for or refinances green projects where, revenue streams from the issuers through fees, taxes, etc. are collateral for the debt example, Hawaii State (backed by a fee on electricity bills of the state utilities).

Project Bond: These bonds are Ring-fenced for the specific underlying green project(s).

Securitization (/Asset Backed Security) Bond: ABS Bonds Refinance portfolios of green projects or proceeds are earmarked for green projects.

30. After-Hours Trading

After-hours trading takes place after the markets have closed and rules of the game for after hour trading are different to that of during regular trading hours. Differences may include the types of orders accepted for after-hours trading, the securities that are available to trade, the presence or absence of market makers, and rules designed to protect investors from poor prices. After-hours trading takes place within computerized trading systems, informally known as “electronic markets,” that operate beyond regular trading hours. These “electronic markets” may include, for example, alternative trading systems (ATSs) and electronic communications networks (ECNs) (both operated by broker-dealers), or exchanges and other markets with electronic trading platforms. While after-hours trading presents investment opportunities, investors should consider the following risks before engaging in after-hours trading say some rules that apply to the handling of orders during regular trading hours do not apply to orders in after-hours trading, lack of liquidity which can affect an investor’s ability to quickly buy or sell stock with a minimal effect on the stock’s price, there may be no market makers actively making markets in most or all stocks (In fact, some stocks may not trade at all during after-hours trading), the reduced level of trading interest in after-hours trading generally results in wider spreads between the bid and ask prices for a stock or no quotes at all, as a result, investors may find it more difficult to get their orders executed or to get as favorable a price as they could have during regular market hours, for stocks with limited trading activity, investors may find greater price fluctuations than they typically would see during regular trading hours, the prices of some stocks traded during after-hours trading may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day, with respect to after-hours trading, many brokerage firms currently accept only limit orders in order to protect investors from unexpectedly bad prices however, if the market moves away from the limit price, the order will not be executed, orders not executed during after-hours trading might be cancelled etc.

30. Alternative Trading Systems

Alternative Trading Systems are electronic trading systems that match orders for buyers and sellers of securities. An ATS is not a national securities exchange. All current ATS's are “dark pools”, meaning trading systems that allow their users to place orders without publicly displaying the size and price of their orders to other participants in the dark pool. These markets are private, available only to chosen subscribers, and are regulated as broker-dealers, not in the way registered exchanges are regulated. This creates disparities that affect investor protection and the operation of the markets as a whole. These systems may also not be adequately surveilled for market manipulation and fraud. In fact, market participants can manipulate the prices in the public securities markets through the use of alternative trading systems. Works are on in making alternative trading systems to choose to be regulated either as exchanges or as broker-dealers. This is because self-regulatory activities in the securities markets must be subject to Securities Commission oversight.

31. Securitized Products Group

Securitized Products Group (SPG) is a private-side, client-facing business area that markets, structures, finances and distributes bonds and loans backed by a range of collateral types. This team works with a wide selection of clients, including banks, hedge funds, private equity sponsors, corporates and asset managers. Structuring, generally involves detailed quantitative and analytical analysis; cash flow modelling; commercial terms negotiation; and review of legal documentation. SPG's team interact with, and often direct the work of, a range of external parties including credit rating agencies, transaction sponsors, lawyers, auditing firms, co-arrangers, and co-placement agents. In terms of Financing banks act as lender to SPG clients; often this includes analytical risk analysis as well as extensive commercial negotiation with clients. Distributing includes liaising with banks dedicated Syndicate team and Sales force, who are tasked with identifying institutional investors interested to purchase the bonds/loans created by the SPG Originations team.

SPG Team also acts as an adviser to banking clients on the various funding, disposal and risk transfer options available to generate regular and predictable cash flows like:

  • Arranging and structuring securitization transactions.

  • Structured finance funding through warehouse facilities or asset backed commercial paper conduits.

  • Sales and trading with distribution.


Securitized Products Group (SPG) is a private-side, client-facing business area that markets, structures, finances and distributes bonds and loans backed by a range of collateral types. This team works with a wide selection of clients, including banks, hedge funds, private equity sponsors, corporates and asset managers. Structuring, generally involves detailed quantitative and analytical analysis; cash flow modelling; commercial terms negotiation; and review of legal documentation. SPG's team interact with, and often direct the work of, a range of external parties including credit rating agencies, transaction sponsors, lawyers, auditing firms, co-arrangers, and co-placement agents. In terms of Financing banks act as lender to SPG clients; often this includes analytical risk analysis as well as extensive commercial negotiation with clients. Distributing includes liaising with banks dedicated Syndicate team and Sales force, who are tasked with identifying institutional investors interested to purchase the bonds/loans created by the SPG Originations team.

SPG Team also acts as an adviser to banking clients on the various funding, disposal and risk transfer options available to generate regular and predictable cash flows like:

  • Arranging and structuring securitization transactions.

  • Structured finance funding through warehouse facilities or asset backed commercial paper conduits.

  • Sales and trading with distribution.