Trade Settlement

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After the trade is done, all confirmed and allocated trade will be transmitted to the back office for trade processing. Trade settlement involves trade confirmation, sending of settlement instructions, position reconciliation, actual trade settlement and resolution of failed trade.

Trade Confirmation

The first thing to do for trade processing is trade confirmation. This practice was recommended in order to minimise trading errors from the trading desk and brokers, and at the same time provide check and balances so that rogue traders cannot create bogus trade without the confirmation from brokers.

Trade confirmation is done by matching the trade from the trading desk with the trade confirmation sent from the brokers.

For very small investment firm, this process can be done manually. Usually the trading desk will hand over the trade ticket to the back office. And the back office will compare the trade ticket with the fax confirmation from the brokers. The trade information in the fax confirmation must match the information contain in the trade ticket.

Broker confirmation usually includes institutional (broker) code, transaction reference code, account number, type of order, stock name, SEDOL or ISIN number of the stock, trade date, trade quantity, price, commission, sales tax (if any) and any other miscellaneous charges. Such confirmation is also known as Broker Delivery Instruction (BDI).

For a larger scale investment firm this process is done by the computer system. Some companies use third party services such as Omgeo to provide trade confirmation services.

Sending of Settlement Instruction

When setting up account for your client, the custodian will provide Standard Settlement Instructions (SSI) for each market. You will also open separate account for your client with each respective brokers. The broker will also provide the format of Broker Delivery Instruction (BDI).

We use BDI to perform trade confirmation and we use SSI to send settlement instructions to the custodians. There are industry association that standardize the SSI.

A typical SSI will include custodian code, transaction type (DVP or Delivery free and Receive Free), nature of the SSI (new, replace or cancel previous instructions), security name, quantity, settlement currency, total settlement amount, brokers’ code, settlement agent and settlement agent’s code. All the above information must be accurate or failed trade may occur.

Transaction Type

Delivery Verse Payment (DVP) – this type of instruction allows custodian to delivery shares only when payment is received or vice versa.

Delivery Free (or Receive Free) – this is usually use when no cash payment is required during delivery of shares. This type of instruction is commonly used for securities lending.   

Nature of SSI

You must also indicate if this instruction is a new instruction or if this instruction is to replace or cancel previous instruction. To replace or cancel previous instruction, you need to also supply previous SSI reference.

Total Settlement Amount

The only computation in the SSI is the total settlement amount. 

Total settlement amount for a 'Buy' order = price x quantity + brokers commission + sales tax or withholding tax (if any) + any other charges. 

Total settlement amount for a 'Sell' order = price x quantity - brokers commission - sales tax or withholding tax (if any) - any other charges.

For manual operation, SSI are usually issued via fax or email (in PDF format). Most investment firm uploads or manually enters such instructions via custodian’s website. The larger investment firm uses SWIFT transfer to automate these tasks.

Besides equity transaction custodian bank will also include SSI for Forex instructions.

Position and Cash Reconciliation

We practice daily reconciliation of position to ensure smooth investment operation. It is also used as a measure against failed trade especially those trade with T+2 and T+3 settlement cycle.

While stock holdings are usually accurate, discrepancies may happen in the various cash accounts. It is the responsibility of the back office to reconcile any discrepancies.

Actual Trade Settlement and Failed Trade

Actual trade settlement happens between the custodian, broker and the clearing house of the stock exchange. As multiple preventive measures are implemented to reduce error, it is rare to encounter failed trade.

However, failed trade can still happen, usually when there is insufficient fund from the buyer. Most of the time, the custodian bank will proceed with the trade by topping up the settlement amount and charged the buyer’s portfolio an overdraft fee. Depending on who is at fault, usually the brokers or the investment firm will bear such penalty.

Another common occurrence of failed trade is incorrect settlement amount. This is very common for global account where the settlement amount is computed based on slightly different exchange rate.

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