Financial Markets Operations Management (33 page)

Trading between any two parties is covered under a set of documents, as shown in
Table 9.12
.

Within the set of documents shown in
Table 9.12
there are many variations, depending on the asset class of the derivative, the year the document was published and in which country the document applies. The International Swaps and Derivatives Association (ISDA), founded in 1985, has over 800 member institutions from 64 countries and has done much to improve the industry's operational structure, reduce counterparty credit risk and increase transparency.

There are six asset classes listed on the ISDA website:

• Credit derivatives/credit default swaps;
  
• Equity derivatives;
  
• Interest rate derivatives;
  
• FX derivatives;
  
• Energy, commodities, developing products;
  
• Structured products and others.
  

A variety of publications including definitions, confirmation templates, etc. can be found for each of these six classes. Please go to the Asset Classes section of the ISDA website (
www2.isda.org/asset-classes
) and familiarise yourself with some of the documentation available.

There is an extensive library and bookstore available on the ISDA website, parts of which are available for members only. The remaining parts are open for general inspection and are categorised as shown in
Table 9.13
.

Please go back to the Bookstore section of the ISDA website (
www.isda.org/publications/ pubguide.aspx
) and familiarise yourself with some of the documentation contained within the nine categories noted in
Table 9.13
.

It will be apparent from your review of the ISDA website just how much documentation is required in the OTC derivatives business. There is a high degree of focus in terms of product type, so organisations will only require the relevant documentation for their own business.

Due to the numerous types of OTCD and their complexities, space does not permit us to look at each of them in turn from an operational point of view. Rather, we will go through the overall process flows from trade capture to maturity, giving some examples along the way. Many of these processes are quite similar across the whole financial operations spectrum and we will concentrate on those that are particularly relevant to OTCD transactions.

As soon as the trades are entered into the trade capture system (either automatically or manually), the details of each trade should be verified. This can be complicated, depending on the type of derivative being entered, and every detail from the trade ticket (term sheet) should be carefully checked. Remember that these are bespoke transactions and not standardised like ETD or cash market products.

If we compare the trade details of a forward rate agreement (FRA) with an option (
Table 9.14
), we can see that the terminology can differ.

In its annual Operations Benchmarking Survey 2013,
¹⁴
ISDA noted that the most common errors across the five product categories
¹⁵
were caused by:

1. Payment date(s)/termination date.
   
2. Miscellaneous fees.
   
3. Counterparty names.
   

Counterparties can initially affirm the key economic details of their trades with each other before sending outgoing confirmations, chasing and reviewing incoming confirmations or investigating and reconciling confirmation discrepancies. A confirmation provides a more detailed view of a transaction at one point in time and should be sent as soon as possible.

In order to standardise the confirmation format, the ISDA has prepared a set of templates. Examples available on the ISDA's Bookstore include an eight-page confirmation of a non-deliverable cross-currency interest rate swap transaction and eighteen forms, of similar length, covering confirmations for the various types of equity-based transaction.

With the notable exception of equity derivatives, confirmations are sent electronically (see
Table 9.15
).

Electronically transmitted confirmations are usually all sent by T+1, with non-electronically transmitted confirmations all sent by T+6 to
T+10. The average number of business days for which confirmations are outstanding tends to be in the region of 0.3 to 1.6 days late, with the notable exception of equity-based (6.1 days).

Depending on the derivatives contract, a settlement action may or may not take place. Some examples are shown in
Tables 9.16
,
9.17
and
9.18
.