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Everything you need to know about trade validation and enrichment in the trade life cycle capital market

The development of technology results in the rapid development of the trading landscape. Messengers were replaced with letters and telephones and the stock ticker was replaced with television. Eventually, everything was replaced by the internet and technology.

Innovative technology incrementally accelerated the trade lifecycle process. Every element from data storage and communication to online banking has affected the way the current market works. In recent times, a specific trade can be executed in a market from the other side of the world in the wink of an eye.

Trade life cycle can be viewed from different angles. It can be looked at as the interaction between the buyer and the seller, however, it can be divided into trading and operational activity. Trading Activity covers everything that happens on the front end of a trade, covering human interaction and automated trading. The operational activity covers every activity behind the scenes such as validation, settlement, and reporting.

Trade Enrichment in Trade Life Cycle

Trade Enrichment refers to an enhancement of something valuable to improve efficiency. It adds specific trade data to the basic trade detail to allow Downstream processing. It involves selection, calculation, and attachment to trade of appropriate information which is essential to complete various required actions following trade capture.

Trade enrichment is the process of applying relevant information to the trade that is necessary to settle the trade correctly.

Trade components that require enhancements are related to:

  • Trade figuration – calculating trade cash values
  • Trade comparison requirements and validation for counterparties
  • Selection of relevant custodian details
  • Issuing Settlement instructions (For example, by SWIFT or fax)
  • Reporting the trade to the regulatory authorities trade Enrichment can be effectively achieved from the static data repository, in an automated environment
  •  Supposing any data items are absent, the trade is treated as an exception and all the processing will be aborted until the required information is added to the static data repository.

Trade Validation in Trade Life Cycle

Soon after the completion of execution, capturing, and enhancing trade, the next step is to establish certain measures known as Trade Validation. In this Trade validation and enrichment in Capital Market, the process inspects if the received trade information in the back-office systems coincides with the front office records.

The tasks that are considered are -

  • Issuing a trade confirmation
  • Reporting the trade to the regulatory authorities
  • Instruction for Issuing settlement
  • Custodian Selection

Utilizing various methodologies to check the restricted data within a completely enriched trade is to reduce the probability of incorrect information being sent to the outside world. The drawback of this step is the extra processing time, however, the downstream impact on time and cost makes it worthwhile. Thus, validation outshines to be an important mechanism to reduce risk and remain prominent.

The reviews to be performed on various trades can be categorized as below.

Fundamental checks – include checking of value date, quantity, trade date, and several other checks

Special trades – includes validation of certain trades such as

  • trades that are deemed to be large
  • trades in a specific market
  • trades with a specific counterparty
  • trades with prior value dates
  • trades with prices outside a specified range
  • trade setting on a Free of Payment (FOP) basis

Exception handling - Trades, that are subdued to exception handling are sent to the relevant person/department for further investigation. If the issue is rectified, the data is updated and the trade is released again for settlement. Few trades may require editions or have to be cancelled, in such instances they are sent back to the front office. In case if any trade is not resolved within the appropriate period of time, then they may be escalated to a more skilled or superior member of the middle office or operations area.

Conclusion

To complete the Asset allocation, and trade life cycle without any errors, Trade Enrichment and Validation play a vital role. First, by selecting and calculating the trade data and secondly, by validating the received trade information in the back office systems. Hence, Trade Validation and Enrichments stand out to be an important activity to reduce risk and remain prominent.

 

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