Chapter 12
The Trade Agreement and Settlement Processes
12.1 THE TRADE AGREEMENT PROCESS
Trade agreement is the process of the trade parties agreeing that orders have been executed in accordance with the ordering party’s wishes. Generically, trade agreement is designed to detect and correct executed orders where either:
- The party concerned recognises the trade, but disagrees one or more details (e.g. incorrect price, value date, etc.); or:
- The party concerned does not recognise the trade at all.
There are four commonly used methods of trade agreement:
- Mutual exchange of confirmations
- The confirmation, affirmation and allocation model
- Use of a central matching engine
- Confirmation followed by no further action.
12.1.1 Mutual exchange of confirmations
This method of trade agreement is mostly used to agree foreign exchange, money market loan and deposit and OTC derivative transactions.
There are a number of variants of this model, but the basic workflow is captured in Figure 12.1. In this workflow, Party A sends Party B a confirmation note that begins “We confirm our purchase from you of….” While Party B sends Party A a confirmation note that begins “We confirm our sale to you of….” It is up to both parties to read the confirmation from the other party and check that their trade details agree to its trade details. If they do agree, there is no need for any further communication between the parties; if they don’t agree, then one party takes the matter up with the other party.
