sudeeparies
New member
Every trade has its own life cycle. The entire Life Cycle of a trade can be broken down into pre-trade and post-trade events. Before going into the details of the trading events, let me explain how a trading deal is being struck between two entities.
We know that one of the primary usages of derivative contract is to hedge the risk. Let us consider that a company has got a floating rate liability in LIBOR (London Inter Bank Offered Rate) and it wants to convert its liability into a fixed rate. The feasible option would be to enter into an Interest Rate Swap. The company would strike a deal with a bank and enter into a swap where it would pay fixed rate to the bank and receive floating rate. The company and the bank would enter into a trade and the trade passes through various stages. The various trade events can be categorized into Front Office, Middle Office and Back Office activities which are explained below: -
Front Office: The FO forms the stage where the trade gets initiated. Here, the order gets placed and the entity will price the instrument and give the quote to the counterparty. If the counterparty agrees to the details of the trade and is willing to enter into the deal, the trade gets executed. The trade is then captured in the trading desk usually using a deal capture system. The deal capture system validates all the necessary trade economics before assigning a trade reference number. Subsequent trade events like amendment, cancellation would refer to the trade with the help of the identifier. An acknowledgement is being sent to the counterparty with the trade details who confirms it back.
Middle Office: The important function that MO performs is to do the Limits and Risk Management. The Limits are being calculated at a business hierarchy level. The usual hierarchy would be at a Portfolio level and subsequently aggregating to a Trader Level, a Desk Level, an Entity Level, and finally to a Group Level. Validations are being done on the trade captured, and in case of any discrepancy, an exception is being raised.
We know that one of the primary usages of derivative contract is to hedge the risk. Let us consider that a company has got a floating rate liability in LIBOR (London Inter Bank Offered Rate) and it wants to convert its liability into a fixed rate. The feasible option would be to enter into an Interest Rate Swap. The company would strike a deal with a bank and enter into a swap where it would pay fixed rate to the bank and receive floating rate. The company and the bank would enter into a trade and the trade passes through various stages. The various trade events can be categorized into Front Office, Middle Office and Back Office activities which are explained below: -
Front Office: The FO forms the stage where the trade gets initiated. Here, the order gets placed and the entity will price the instrument and give the quote to the counterparty. If the counterparty agrees to the details of the trade and is willing to enter into the deal, the trade gets executed. The trade is then captured in the trading desk usually using a deal capture system. The deal capture system validates all the necessary trade economics before assigning a trade reference number. Subsequent trade events like amendment, cancellation would refer to the trade with the help of the identifier. An acknowledgement is being sent to the counterparty with the trade details who confirms it back.
Middle Office: The important function that MO performs is to do the Limits and Risk Management. The Limits are being calculated at a business hierarchy level. The usual hierarchy would be at a Portfolio level and subsequently aggregating to a Trader Level, a Desk Level, an Entity Level, and finally to a Group Level. Validations are being done on the trade captured, and in case of any discrepancy, an exception is being raised.
