The Trade Lifecycle: Behind the Scenes of the Trading Process

8

Lifecycle

This chapter examines the full lifecycle of a trade.

8.1 PRE EXECUTION

Systems and processes need to handle two common pre trade situations. Both cases outlined here give rise to a virtual trade ticket necessary for keeping all of the requisite trade details. The virtual trade can then be converted into an actual trade if and when it is executed.

8.1.1 Provisional trades

For a complicated or structured deal comprising many parts, the trading parties might design a provisional trade. They will agree on a period of time for due consideration and amendments before a final execution date. There may also be conditions and penalties if one side pulls out of the agreement to trade.

Such provisional trades will need to be circulated to interested parties such as:

• the legal department for scrutiny;

• market risk control to stress test;

• credit risk control to determine whether sufficient credit facility (or line) is available with the particular counterparty;

• trading desks to prepare other trades required to hedge the risk of the provisional trade.

Many investment banks and hedge funds have special non trading portfolios for such provisional deals. These maintain the division between real and virtual trades, but allow for the provisional trades to filter through required checks and processes and make it easier to convert the provisional trade into reality when the execution is enacted.

Risks associated with provisional trades: the extent to which a provisional trade carries ...