operations certificate programme · page 1 . operations certificate programme duration: 5 days ....

Operations Certificate Programme Duration: 5 days

The OCP Certificate is intended primarily for two types of candidate. Firstly, operations practitioners within their first ten years in the industry and secondly, operations managers who would benefit from a broader knowledge of the various operational functions in the industry.

Description: This section utilises all the concepts covered in Level I, and:

• describes the Securities Trade Lifecycle at a detailed level, incorporating a full-blown Securities Trade Lifecycle simulation

• describes extremely important tasks that either 1) result from securities trade processing, and/or 2) relate to the management of existing securities positions

o some such tasks form an essential part of a firm’s cost reduction and operational efficiency methods

o in some cases such tasks are offered to clients as an optional service, or may be mandatory events following which trades and positions will be adjusted

• in all cases, accurate and timely processing and the application of relevant controls will be emphasised and reinforced to the delegates - imperative if monetary/reputation loss is to be avoided.

DAILY OCP TIMETABLE

Start End Training Hours (Cumulative)

09:00 10:30 Session 1 1½

10:30 10:45 Break -

10:45 12:30 Session 2 3¼

12:30 13:30 Lunch -

13:30 15:00 Session 3 4¾

15:00 15:15 Break -

15:15 16:45 Session 4 6¼

16:45 17:00 Break -

17:00 18:15 Session 5 7½

Section Heading Sub-Heading

Operations Certificate Programme

Securities Operations Day 1 Morning-into-Afternoon - Timing: 09:00 – 12:30

Introduction: the primary objective in trade processing is for the trade to settle on its due date. Reaching that objective is not accomplished by the completion of one single task; instead, timely settlement results from a range of consecutive tasks, each of which builds upon the

successful completion of the prior task. These tasks are collectively known as the Securities Trade Lifecycle.

1 The Securities Trade Lifecycle

Orders:

Purpose

Who Issues Orders?

Who Receives Orders?

Order Types

Trade Execution:

Order-Driven Markets

Quote Driven Markets

Exchange-Traded vs OTC

Fully Automated Trading Systems (Brokertec, MTS, Eurex, MEF)

Less Automated Trading Systems (working title)

Electronic Trading (incl. ECNs)

Voice Brokers and IDBs

The Short Selling Regulation

Changes to Settlement Cycles

Trade Capture (Front Office):

Capture Methods

Components

Speed

Accuracy

Trade Capture (Operations):

Implications of Successful Capture

Facilitating Successful Capture

Identifying Failed Capture

Implications of Failure to Capture

Reasons for failed Capture

Trade Enrichment:

Purpose

What’s added to basic trade details

Achieving automated enrichment

Importance of Static Data

Trade Agreement:

Purpose

Methods

Trade Confirmation (manual, electronic),

Trade Affirmation (Oasys Global),

Implications of Failing to Agree

Settlement Instructions:

Purpose

Methods

Deadlines

Time-Zone Differences

Implications of Failing to Instruct



Securities Operations Day 1 Morning-into-Afternoon (continued) - Timing: 09:00 – 12:30 (continued)

1 (cont’d)

The Securities Trade Lifecycle (cont’d)

Settlement Instruction Statuses:

Purpose

Status Types & Meaning

Required Action

Implications of Unmatched Instructions

Failed Trades:

Definition

Causes

Implications

Prevention

Minimising Impact

Enforcing Settlement

New Regulation: Fining and Buy-In

Trade Settlement:

Definition

Causes of Successful Settlement

Full Settlement

Partial Settlement

Securities Only Settlement

Cash Only Settlement

Gross versus Net Settlement

Target 2 Securities (T2S)

Updating Books & Records:

Definition

Purpose

Implications of Successful Update

Implications of Unsuccessful Update

Reconciliation:

Definition

Purpose

Types

Methods

Risks



Securities Operations Day 1 Afternoon - Timing: 13:30 – 18:00

2 The Securities Trade Lifecycle Simulation

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

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



Securities Operations Day 1Afternoon: Timing: 13:30 – 18:00 (this section will be run in parallel with the Securities

Trade Lifecycle Simulation) Introduction: if an Operations professional is to understand the processing nuances of a variety of transaction types, that task will be made considerably easier if the fundamental

method of accounting for such transactions is understood. This is a structured method of determining/analysing the implications of processing a range of transaction types including buy/sell, repos, securities lending & borrowing, incoming & outgoing collateral, corporate

actions.

3 Securities Bookkeeping

Definition & Purpose

Importance of Accurate Books & Records:

Link with Reconciliation

Double-Entry Bookkeeping

When Entries Must be Passed - Trades:

Trade Date

Value Date

Settlement Date

When Entries Must be Passed - Positions:

Marking-to-Market

Realised/Unrealised P&L

Application in Different Transaction Types




Introduction: the practice of securities financing utilises securities held by a firm to 1) secure a cash borrowing or to 2) lend such equities and bonds in return for additional revenue. During

the lifetime of a securities financing trade, the daily movement in the market value of the securities involved causes exposures that each firm must mitigate. Such transactions cause multiple securities &/or cash movements during their lifetime, all of which must be settled in a

timely manner if risks are to be mitigated.

4 International Securities Financing Transactions

Definition and Family of Instruments

Introduction: for many sell-side firms, the funding costs of maintaining proprietary positions is a reality that must be faced constantly, therefore keeping funding costs to a minimum is paramount if a firm is to maximise its trading profits. The borrowing of cash versus bonds given as collateral is a popular method of minimising funding costs.

4a Repo

The Instrument:

Transaction Structure and Mechanics

Market Conventions

Principal Purposes and Drivers

Terminology

Collateral Issues:

Valuation of Collateral

Initial Margin/Haircut

Marking-to-Market & Margin Maintenance

Right of Substitution of Collateral

Custody & Settlement (Delivery, HIC, Tri-Party)

What Happens in a Default

Failure to Deliver Collateral

Legal Documentation (GMRA)

Key Features:

Legal Structure: Title Transfer

Comparison with Secured Loans

Economic Effect: Borrowing and Lending

Treatment of Collateral Income

Credit and Liquidity Risk

Implications for Accounting of Repo (Repo 105)

Basic Tax Issues

Synthetic Repo

Specials and GC Repo:

General Collateral

GC repo Rate & Spreads to Unsecured

Specials

Specials Drivers, Patterns of Specialness

Comparison with Securities Lending

Repo Structures:

Repurchase Agreements

Sell/Buy-Back (and forward price)

Floating Rate Repo

Open Repo

Forward Repo

Term Repo

Collateral Up/Downgrade

Collateral Transformation/Liquidity Swaps




4a (cont’d)

Repo (continued)

Tri-party Repo:

Structure

Basic Operations

Collateral Selection and Optimisation

Re-use Facilities

European vs US Tri-party

Market Structure:

Size and Composition of the Market

Electronic Trading

Central Counterparties

GC Financing/Pooling

Repo Trade Repositories




Introduction: for both buy-side and sell-side firms, the equities and bonds they own can be made to generate further revenue if the firm is prepared to lend such securities. Other firms

need to settle sales of securities in a timely fashion, and so such firms become securities borrowers. In order to mitigate the securities lender’s risk, the securities borrower must

provide collateral in the form of cash or other securities.

4b Securities Lending & Borrowing

The Instrument:

Transaction Structures

Terminology

Principal Purposes & Drivers (Lending & Borrowing)

Legal and Economic Structure

Lender’s Right of Recall

Borrower’s Right of Return

Indemnification by Agent Lenders

Borrowing Fees

Securities Lending versus Repo

Market Structure:

Size and Composition of the Market

End Users

Intermediaries

Collateral Issues:

Initial Margin

Margin Maintenance

Cash Collateral Management

Collateral Delivery

Custody and Settlement (Bilateral & Tri-party)

Treatment of Collateral Income

Corporate Actions

Voting Rights

What Happens in a Default

Failure to Deliver Collateral

Legal Documentation (GMSLA)




4c Repo Exercise/Simulation

The Repo Trade Lifecycle Overview

Opening Leg Settlement:

Settlement of Cash versus Collateral

Throughout Life of Transaction:

Introduction

Marking-to-Market

Bond Accrued Interest

Repo Interest to Date

Margin Calls

Collateral Substitution

Income Payments

Corporate Actions

Closing Leg Settlement

Updating Books & Records



Securities Operations Day 3 Morning - Timing: 09:00 – 10:00

Introduction: some investment banks choose to offer their clients the service of holding the clients’ securities (and possibly cash) on the clients’ behalf; by providing this service, the bank

becomes a custodian to the client. This in turn introduces a range of risks to the bank, from verifying incoming settlement instructions to the processing of optional corporate actions.

5 Safe Custody


Service Components:

Holding Securities

Holding Cash/Currencies

Securities & Cash Movement Types

Income & Corporate Actions

Valuation

Statements

Legal Agreements:

Structure of Safe Custody Accounts

Authenticating Instructions Received

Other Risks & Controls

Service Charges

Updating Books & Records




Introduction: equity and bond positions (and trades) are impacted by corporate action events

that are either scheduled or announced by the issuer; trading positions, settled positions and

open trades are all subject to adjustment. This topic contains numerous points of risk which

many institutions have experienced to their cost. Knowledge of securities and their processing

is incomplete without an understanding of this challenging topic.

6 Corporate Actions

Introduction:

Overview of corporate actions, including:

Definition

Purpose

Reliance on Trade & Position Management

Fundamental Concepts:

Event Classification

Issuer’s Objectives

Event Initiation

Ultimate Impact of Event

Responsibilities of a Corporate Actions Dep’t

Major Processing Steps

Major Risks

Corporate Actions Lifecycles Overview:

Processing Lifecycle Characteristics of:

Mandatory Events

Mandatory with Options Events

Voluntary Events

Multi-Stage Events

Issuer Notices

Corporate Action Event Types

Focus on Numerous Event Types, including:

Cash Dividends

Optional Dividends

Dividend Reinvestment Plans

Fixed-Rate & Floating-Rate Coupon Payments

Bonus Issues

Stock Splits, Reverse Splits/Consolidations

Odd-Lot Offers

Bond Conversions

Early/Partial/Voluntary Redemptions

Final Maturity

Rights Issues

Takeovers

The Generic (Mandatory Event) Lifecycle – Overview

Overview of Each Major Step in the Mandatory Event Lifecycle, namely;

Declaration of Event Terms

Capturing Event Terms

Ascertaining Entitlement




6 (cont’d)

Corporate Actions (cont’d) The Generic (Mandatory Event) Lifecycle: Overview (cont’d):

Informing Relevant Parties

Calculating Resultant Entitlement

Updating Books & Records #1

Receiving & Crediting Resultant Entitlement

Updating Books & Records #2

Tax on Income Events - Overview:

Withholding Tax

Domestic Tax

Internal/External Securities Position Management

Over-Taxation

Tax Returns to Tax Authorities

Mandatory with Options Event and Voluntary Event Lifecycles; Overview:

Characteristics of Optional & Voluntary Events

Differences vs. the Mandatory Event Lifecycle

Associated Management Implications

Event Terms

Requesting Election Decisions

Monitoring Outstanding Election Decisions

Managing Incoming Election Decisions

Issuing Outgoing Election Instructions

Calculating Resultant Entitlement



Derivative Operations and Collateral Management Day 4 Morning - Timing: 09:00 – 11:00

Introduction: the group of products known as OTC Derivatives have become a major aspect of the financial services industry; from a general Operations viewpoint, this is regarded as a

specialist area. However, price movements in OTC derivative trades give rise to the requirement to give and/or take collateral. As collateral may be in the form of cash or securities, deliveries and receipts of securities can occur for reasons completely dis-

associated with securities trading. It is therefore important that an Operations professional is aware of the underlying reasons for such incoming & outgoing movements of securities.

Additional challenges of giving &/or receiving securities collateral is the potential re-use of such collateral and the impact on income processing. The purpose of this section is to

describe the elementary aspects of OTC derivatives.

7 Derivative Fundamentals

Introduction

The Derivatives Marketplace:

Exchange Traded versus OTC Derivatives

Derivative Exchanges

Basic Derivative Types:

Futures

Options

Swaps

8 OTC Derivatives; An Introduction

Structural Aspects of OTC Derivatives:

Generic Product Definition

The Nature of the Trade

Parties to a Trade

Trade Tenor

Exchange of Notional Value

Trade Settlement

Exiting a Trade

Legal Documentation:

ISDA Master Agreement

The Schedule

Credit Support Annex

Trade Confirmation



Derivative Operations and Collateral Management Day 4 Afternoon - Timing: 11:15 – 13:00

Introduction: this section focuses more specifically on particular OTC derivative products, and explains the basic purpose of each product prior to describing their particular characteristics,

including their settlement and Operational requirements, prior to describing the associated collateral activity.

9 OTC Derivative Products & Their Processing Characteristics

Introduction

For each product listed below, the following aspects will be covered:

1) Product Definition & Purpose

2) The Investors’ Need

3) Structure & Characteristics

4) The Trade Lifecycle

5) Benefits & Risks

6) Operations Activity Overview

7) Product Variations Overview

Example OTC Derivative Products:

Credit Default Swaps

Contracts for Difference

Currency Swaps

Foreign Exchange Swaps

Fixed Foreign Exchange Forwards

Non-Deliverable Forwards

Interest Rate Swaps

Forward Rate Agreements



Derivative Operations and Collateral Management Day 4 Afternoon - Timing: 14:00 – 15:30

Introduction: the practice of giving and taking collateral has gained a very high profile since the

2008 financial crisis. The management of collateral relates to mitigation of exposures in OTC

derivatives (and other products) and involves a defined series of processing steps. To date, collateral management has related to direct exposure with bilateral counterparties, but this will

change in 2013-14. This section introduces collateral management relating to OTC derivatives, and in particular describes the rules by which a firm must abide on a daily basis, in order for its

exposures to be mitigated.

10 Collateral Management for OTC Derivatives

Collateral Concepts for OTC Derivatives:

How Exposures Arise on OTC D

Specific Purpose of OTCD Collateral

Collateral Differences vs. Repo & SLB

Why the Increased Focus on Collateral?

Collateral Impact on Regulatory Capital

Overview of OTCD Collateral Lifecycle

Types of Collateral:

Cash

Bonds

Legal Protection:

Necessity of Legal Protection

Master Agreements

Credit Support Annexes

Haircut Calculation

Confirmations

Static Data:

Concepts of Static Data

Concepts of Straight Through Processing

Static Data & STP in Collateral Management



Derivative Operations and Collateral Management Day 4 Afternoon (continued) - Timing: 15:30 – 18:00

and

Day 5 Morning - Timing: 09:00 – 10:30

Introduction: this section takes the rules described within the prior section, and places such rules within the daily activity known as the Collateral Lifecycle, a series of sequential steps resulting in

collateral receipt or delivery. The central aspects of the Collateral Lifecycle will be run as a simulation, where each delegate will form part of a trading firm, and the primary steps in the

lifecycle will be acted out.

11 The OTC Derivative Collateral Lifecycle

Throughout Lifetime of Trade

Portfolio & Exposure Reconciliation:


Benefits

Method

Causes of Discrepancies

Discrepancy Resolution

Marking-to-Market:


Method

Collateral Call Calculation:


Frequency

Uniqueness of Counterparty Arrangements

Determining Factors

Making & Receiving Collateral Calls:

Issuing/Receiving Collateral Demands

Deadlines & Time-Zone Differences

Steps in Processing Collateral Demands

Agreeing / Disputing Collateral Demands

Settling Collateral Demands

Cash Collateral vs Bond Collateral

Holding Bond Collateral

Reuse of Collateral

Security Interest vs Title Transfer

Collateral Substitution:


Circumstances Causing Substitution

Settling Collateral Substitutions

Risks When Substituting

Income & Corporate Actions:

Impact on Collateral Giver & Taker

Trade Termination:


Early Termination

Termination on Scheduled Maturity Date

Impact on Collateral



Derivative Operations and Collateral Management Day 5 Morning-into-Afternoon - Timing: 10:45 – 12:30

and

Day 5 Afternoon - Timing: 13:30 – 14:30

Introduction: the introduction (during 2013-14) of an entirely new set of regulatory measures relating to OTC derivatives has an extreme impact on ongoing counterparty exposures, which in turn

impacts collateral management which in itself is designed to mitigate risk. The implications, both from a trading and an operational perspective, are far-reaching in a number of senses, and will

impact both sell-side and buy-side firms.

12 Regulatory Change for OTC Derivatives

Introduction:

Trading on Exchanges or Electronic Trading Platforms: Overview

Central Clearing: Overview

Capital Requirements: Overview

Trade Repositories: Overview

13 Central Clearing & its Impact on Collateral

Central Clearing Primary Concepts:

Trade Netting

Capital Benefits

Central Counterparty Membership Structure:

Central Clearing for Clearing Members

Central Clearing for Non-Members

Multiple Central Counterparty Implications:

Interoperability

Netting & Capital Implications

Risk Management within Central Counterparties:

Margin Requirements

Eligible Collateral

Impact of Collateral

Collateral for Buy-Side Firms

Operational Implications of Central Clearing

Communicating New Trades to the Central Counterparty

Cleared versus Uncleared Trades

Legacy Trades:

Backloading Method

Netting & Capital Benefits

Legal Documentation for Central Clearing

Central Counterparty Regulation & Supervision

Clearing Member Insolvency

Central Counterparty Insolvency

Collateral Requirements on Buy-Side Firms:

Impact of Initial Margin & Variation Margin

14 Central Clearing & Collateral Transformation

Collateral Transformation; Purpose & Methods:

Repo

Securities Lending

Operational Implications of Collateral Transformation


Exam Revision Day 5 Afternoon - Timing: 14:30 – 18:00

Introduction: this is a ‘free’ session where each delegate can choose exactly how they wish to use the time. MS will be available for Q&A for the entire period. Where there are a number of delegates expressing interest in re-visiting particular topics, MS will organise timed sessions where individual

delegates may choose to attend (e.g. ‘Corporate Actions’ session will be run 15:30 – 16:00, and ‘Collateral Management’ will be run 16:30 – 17:00). This is designed to make the most efficient use

of the delegates’ available time.

Exam Revision Session


Exam Day 6 Morning - Timing: 09:00 – 12:00

Introduction: this is the exam itself, which will be run very formally in a room laid out in a particular fashion (e.g. with a minimum space between each desk), requiring both MS and an assistant to

invigilate.

Exam

operations certificate programme · page 1 . operations certificate programme duration: 5 days ....

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