Operations and settlement
Operations and settlement tests the post-trade lifecycle: confirmation, affirmation, clearing, settlement, corporate actions, reconciliation, and fails management. Questions often hinge on dates, cash amounts, and ownership records.
Lifecycle and controls
- Trade capture must be timely and complete; confirmation and affirmation match economic terms before settlement.
- Clearing novates or centralizes counterparty risk; settlement transfers cash and securities, often through a CSD.
- Reconciliation compares internal records with custodians, counterparties, and CSDs; breaks need ownership and aging.
- Corporate actions include dividends, splits, mergers, and proxy votes; entitlement depends on record date and holding.
Worked example
A client buys 1,000 shares at 20.00 with commission of 0.10%. Commission = 1,000 × 20.00 × 0.001 = 20.00. Settlement amount = 20,000 + 20 = 20,020. Under T+1, a trade executed on Friday settles on Monday, assuming Monday is a business day. If Monday is a holiday, settlement moves to the next business day. Booking the cash on trade date without the settlement date creates a reconciliation break.
Traps
Confusing trade date with settlement date; forgetting accrued interest on bonds; applying a split to the wrong side of the record date; netting cash and securities incorrectly; letting fails age without buy-in or escalation.