Financial Markets Operations Management (14 page)

In the early 1980s, the author was working in a Eurobond Settlements Department where manual ledgers were still being used to record Eurobond purchases and sales. He remembers that:

“Euroclear, who held our Eurobonds, would publish a thick, hard-copy directory every six months containing basic details of every security that they were prepared to hold.

Every time a transaction ticket came down from the trading floor, the first thing we had to do was to find the particular bond in the Euroclear directory. From this, we could find the following information:

• The correct name of the bond, including the coupon rate and full maturity date);
  
• The securities identification number (unique to Euroclear);
  
• The last coupon payment date.
  

This would enable us to calculate the accrued interest, arrange for a confirmation note to be typed up and prepare the appropriate delivery/receipt instructions. These would be transmitted to Euroclear's proprietary system (known as Euclid) via an acoustic coupler (an interface device for coupling electrical signals by acoustical means) that was hooked up to a telephone handset.

In effect, we were using the directory as a manual version of a securities database. The main drawback was that this process took quite some time, especially as there was only one directory book for the whole department! The situation improved when the department was computerised; however, the system that we purchased used the Euroclear securities identification system (as we had done previously in the manual environment). This gave us problems when we were communicating with Cedel (now known as Clearstream Banking Luxembourg). Cedel had its own directory and unique numbering system …”

Let us consider a basic securities transaction, thinking about the information that is provided by the Front Office and comparing that with the information we need to be able to settle the transaction effectively. In today's environment, the majority of transaction information will arrive in the Operations area in an automated and electronic fashion. To help with the visualisation of the information, it is worth considering a transaction example using a hard copy dealing ticket.

   

Then ask yourself whether there are sufficient details on the dealing ticket to enable you to settle the transaction. The answer should be “No”; it will, therefore, be our responsibility to add the appropriate elements of information so that we can prepare, for example, confirmation notes and settlement instructions, update our books and records and all the other various processes.

From the transaction in the previous section, we can create a list of examples of the required reference data (see
Table 3.2
).

We will now consider what data we require for three of these data types:

• Securities;
  
• Counterparties and customers;
  
• Settlement information.
  

The challenge for the industry is to enable information to be classified and standardised in such a way that the users of information can access it and interpret it no matter what type of industry participant they are or in which market they are located.

We will look at two issues regarding securities: the identification of securities and the classification of securities. Traditionally, securities issued in one
particular market would be identified by a national numbering system unique to that market.
Table 3.3
shows some examples of local numbering systems.

Whilst national numbering systems work well in a local context, a unique identifier is required in an international context. The internationally recognised standard for securities is the International Securities Identification Numbering system (ISIN). ISINs are issued by national numbering agencies (NNAs) using guidelines published by the Association of National Numbering Agencies (
www.anna-web.org
). An ISIN consists of 12 characters: a country code (two letters), nine characters taken up by the local number of the security and a final character acting as a check digit.

The NNA will typically be located in the country where the securities issuer is legally registered or, for debt securities, the NNA might be one of the international securities clearing organisations.

The international standard appropriate to ISINs is the International Organization for Standardization (ISO) 6166.

ANNA also acts as the registration authority for ISO 10962 – the Classification of Financial Instruments (CFI) Codes. CFI codes are allocated by the agency that allocates the ISIN and consist of six alphabetical characters that enable users to identify the type of financial instrument, its characteristics and attributes (see
Table 3.4
).

Tables 3.5a
and
3.5b
give some CFI classification examples.

In summary, for every type of financial instrument there will be a unique identifier and classification that enables users to standardise the information. However, there is yet more information that we need to know about the securities we are processing. We will look at this for examples involving a debt security (see
Figure 3.1
) and an equity security (see
Figure 3.2
).

There is a requirement that information on counterparties and customers should be sufficient to enable:

1. Financial institutions to effectively communicate with their counterparties and customers.
   
2. Financial institutions to verify counterparty/customer identification information.
   
3. Counterparties/customers to operate within anti-money-laundering regulations.
   
4. Customer due diligence to be undertaken.
   
5. The identification of politically exposed persons (PEPs).
   
6. The submission of suspicious activity reports (SARs) to the appropriate authority.
   

For businesses, we need to keep identification information such as:

• Full name of the business entity;
  
• The entity's designation (e.g. Limited, plc, SA, Inc. etc.);
  
• Trading name;
  
• Registered number;
  
• VAT and/or tax reference number;
  
• Country of incorporation;
  
• Business/trading address;
  
• Registered office address;
  
• Names of directors;
  
• Details of any individuals who own/control/exercise control over the management of the entity.
  

This information enables us to identify individuals, counterparties, customers and, not least of all, the companies for whom we are working. There is still information that we need to know, and this can include the following:

• Short name and reference number for counterparties and customers (used for internal reporting purposes);
  
• The type of counterparty (e.g. institutional client, broker, trading organisation, etc.);
  
• Any companies associated with a counterparty (plus the relationship);
  
• Names and locations of custodians together with account numbers for both securities and cash;
  
• Standing settlement instructions (the media through which instructions are sent to custodians and clearing houses);
  
• Membership of exchanges (for reporting purposes).