Clearing and Settlement of Derivatives

86 Clearing and settlement of derivatives

The investor will have to pay a premium of £200, being 1000

shares  the price of 20p, to secure the right to take delivery at a

day of their choice of 1000 shares at 330p until expiry in October.

If the buyer exercises their right they will then pay 1000 

330p  £3300 to take delivery of the 1000 BP shares irrespective

of the price BP might be in the stock market at that time.

Workflow road map

We can use the option shown in the above example to follow the work-

flow associated with on-exchange option transactions.

In the following text we describe the process from the point of view

of the broker, in this case a clearing member of an exchange, and also

make reference to the workflow from an institutional client’s position.

Trade capture

In the case of an electronic exchange these details are automatically

captured from the trader’s action on the dealing screen. In the case

of an open outcry market the details are either input into an

electronic matching system by the trader or alternatively a deal ticket

is completed, which is then passed to support staff for input to the

exchange matching system.

The actual clearing and settlement processes for markets differ as

do the procedures adopted internally by firms. However, the following

table illustrates the kind of option trade details that are likely to be

needed. These will be:

Data Detail Source

Option BP Trade ticket/Deal system

Market Euronext.liffe Trade ticket/Deal system

Maturity October Trade ticket/Deal system

Strike price 330 Trade ticket/Deal system

Call or Put Call Trade ticket/Deal system

Shares per contract 1000 Contract specification

Buy/Sell Buy Trade ticket/Deal system

Counterparty xxx Trade ticket/Deal system

Time of trade 00/00 dd/mm/yy Trade ticket/Deal system

Transaction reference xxxxxx System-generated

Client/Principal trade Client Trade ticket/Deal system

Execution broker N/A Trade ticket/Deal system

The institutional client that has placed the order with their broker

has in essence the same data requirements but obviously has no

reference to Principal Trading.

It is important to note that high-quality static data on options, like

all products, is crucial as today most firms use systems for the

processes involved from trade to settlement and beyond.

Trade validation

The transaction must be validated.

This process needs the confirmation of the trade details received

from the front office against the data being received from the market.

This may be via a system link to the exchange, for instance the TRS

used on Euronext.liffe.

The TRS provides details of transactions that have taken place in

the market. Each trade is shown whether the firm has transacted it,

it has been ‘given in’ by an executing broker for the firm’s account or

client account or it is to be ‘given up’ to another clearing member. It

is then accepted by the member and internally confirmed against the

order details.

As the trades showing are registered to the firm’s account at the

clearing house and are therefore due for settlement of any obligations

arising, it is important that any discrepancy between the trade details

and the order details is notified to the relevant dealer/trader and

resolved quickly.

Trade enrichment

To be able to process the trade internally we will need to:

1. Book the trade to the relevant client account or trading book.

2. Identify if the trade is an opening or closing transaction.

3. Perform the margin calculation (if applicable).

4. Charge the relevant commission.

5. Charge other fees (if applicable).

6. Perform the settlement of the transaction with the clearing house.

7. Effect the client settlement instructions.

Booking trade to the relevant client account or trading book

The details for this will be on the database and the posting will either

be automatically generated by the dealing system to the operations

system or need to be input from a trade ticket or similar document.

The accurate posting of the transaction is a vital function as the

Options processing 87