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

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