Chapter 5: The Role of Technology in the Pre-Settlement Phase

Question 1

what is reference data?

Answer 1

data used for classification purposes across an
entire organisation

Question 2

why is data accuracy important?

Answer 2

no longer “just” a component of data quality. It is quite literally the most important characteristic that makes data usable and purposeful.

Question 3

what is accurate reference data needed for?

Answer 3

• calculate trade amounts, interest, commissions, fees and taxes accurately
• enrich trades with accurate information about intended value dates, settlement agents and account codes at the settlement agents

Question 4

what is a data repository?

Answer 4

storage space for researchers to deposit data sets associated with their research. take in data from reliable external sources (such as Bloomberg or Refinitiv), as well as data that has been
updated manually internally, and then feed this to all the
other systems in the configuration

Question 5

what are the advantages of RDRs?

Answer 5

Ensures consistency
fed from consistent and reliable external sources
maintained by a dedicated data management team that has expertise

Question 6

what are the disadvantages of RDRs?

Answer 6

Complex and costly to maintain
All other systems in the configuration will also need to be enhanced to integrate with the RDR
team may be costly to recruit and maintain

Question 7

what is instrument reference information?

Answer 7

Reference data about financial instruments

Question 8

what instrument reference information needs to be maintained?

Answer 8

1. Trading Markets and Market Rules
2. Unique Instrument Identifiers
3. Price Calculation Methods
4. Interest Details and Accrued Interest
   Calculation Methods

Question 9

what are market rules?

Answer 9

• Default settlement date
• Fees and charges
• trade and settlement currency
• Each instrument needs to have a market code

Question 10

what is a Unique Instrument Identifiers?

Answer 10

a code that can be used to identify a specific financial instrument

Question 11

what is the formula for calculating principal amount?

Answer 11

𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍 𝒂𝒎𝒐𝒖𝒏𝒕 = 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒕𝒓𝒂𝒅𝒆𝒅 × 𝒑𝒓𝒊𝒄𝒆 ×
(𝒑𝒓𝒊𝒄𝒆 𝒎𝒖𝒍𝒕𝒊𝒑𝒍𝒊𝒆𝒓/𝒑𝒓𝒊𝒄𝒆 𝒅𝒊𝒗𝒊𝒔𝒐r)

Question 12

what is the price multiplier?

Answer 12

a factor that adjusts the price of a security to reflect its value in terms of another currency or asset

Question 13

what is the price divisor?

Answer 13

a factor that adjusts the price of a security to reflect changes such as stock splits or dividends

Question 14

what is the information needed to calculate interest?

Answer 14

• The date from which interest becomes payable (accrual date)
• The date that the borrower will make the next interest payment (coupon date)
• The date when interest ceases to become payable and the capital returned (maturity date)
• The rate of interest that will be paid

Question 15

what is counterparty reference information?

Answer 15

the information that identifies and describes the entity on the other side of a financial transaction

Question 16

what are the 4 types of external identifiers?

Answer 16

• Business Identifier Code (BIC) for professional trade parties,
• UK National Insurance Number for tax-sheltered investments,
• International Bank Account Number (IBAN) for bank and depot accounts in Europe, and
• Legal Entity Identifier (LEI) for non-natural persons

Question 17

what other party information does the firm need to keep a record of?

Answer 17

Standing Settlement Instructions (SSIs) (market participant’s default instructions for the payment and delivery of securities. They help to reduce settlement risk and improve automation)

Question 18

what is external reference information?

Answer 18

information that is not directly related to the firm itself or its trading counterparties but is still important for conducting business operations

Question 19

what are the problems that can arise due to inaccurate ref data?

Answer 19

failed trades, unmatched instructions, and incorrect profits and interest income

Question 20

what are client/counterparty agreements?

Answer 20

agreements between a firm and its clients. ‘Counterparty agreements’ are agreements between fellow professionals

Question 21

what industry standards can counterparty agreements be based on?

Answer 21

industry standards and protocols that are widely accepted and used by financial firms e.g., ISDA (OTC derivatives), GMRA (bonds)

Question 22

what is a durable medium (client agreements)?

Answer 22

client must agree to it in writing on paper or another
durable medium (DVD, CD, Hard Drive). can store information for a long time and reproduce it unchanged

Question 23

what is the usual trade agreement process?

Answer 23

confirmation, affirmation and allocation

Question 24

how does the trade agreement process change when dealing with retail investors?

Answer 24

the sell-side firm typically sends a trade confirmation, but the investor does not normally respond unless there is a problem

Question 25

what is a mutual exchange of confirmations?

Answer 25

method of trade agreement where each party sends a confirmation note to the other party with their trade details. Both parties have to check that their trade details match with the other party’s confirmation note

Question 26

what is the role of matching engines?

Answer 26

computer programs that automate the process of confirmation matching between trading parties. provided by exchanges and clearing houses for their member firms

Question 27

what are the technology implications of trade agreement?

Answer 27

- they will need tech to send and receive confirmations and track status' - tech with the ability to support the confirmation/ affirmation/ allocation process - need to be able to communicate with central matching engines

Question 28

what does MiFIR require firms to do in post trade transparency?

Answer 28

requires investment firms to report all price-forming off-exchange executions by eligible MiFID investment firms in MiFID-eligible instruments

Question 29

how are transaction reports different to trade reports?

Answer 29

Transaction reports are different from trade reports, as they are for private dissemination of data to the regulator

Question 30

what are The Technology Implications of Regulatory Transaction Reporting?

Answer 30

firms need to make sure they report their trades accurately and within the required timeframes to the relevant regulatory authorities

Question 31

what do firms need to focus on in terms of reporting trades accurately?

Answer 31

1. Making sure their trade capture systems record all the necessary data. 2. Establishing robust business rules to ensure the correct transactions are reported. 3. Integrating their technology with the regulatory authorities to automate reporting. 4. Implementing operational processes to ensure all transactions are reported and any issues are addressed quickly

Question 32

what do COBS rules dictate?

Answer 32

the minimum information that must be included in a periodic statement of account for retail customers Statements must be sent to retail clients at least once every six months, but clients can request statements every three months