OperationsMedium

3 min read · 496 words

What the seat actually does

A trade agreed on a screen is not finished. It has to be confirmed against what the other side thinks was agreed, cleared, settled, recorded in the right account and reconciled against everything else. Operations is that, and it is the half of a trade that is invisible from a price screen.

The work is exceptions. The overwhelming majority of trades settle without a human touching them; the seat exists for the small percentage that do not, and for the systems that keep that percentage small. A break nobody chases is a position the firm does not know it has.

• Confirmation and affirmation — proving both sides agree before anything moves.
• Settlement — delivery against payment, and the fails when one leg does not arrive. See clearing and settlement.
• Reconciliation — the firm's records against the custodian's, the clearer's and the counterparty's.
• Corporate actions — dividends, splits, elections and deadlines. See corporate actions.

A day, and where it goes

• Fails. What did not settle yesterday, why, and what it costs while it stays unsettled.
• Breaks — the reconciliation differences, ranked by age rather than by size, because an old break is usually a real one.
• Deadlines. Corporate action elections that expire today and cannot be reopened.
• Margin and collateral movements, agreed and disputed.

What it is measured on

• Settlement rate — the share that settled on the intended date without intervention.
• Ageing of breaks, which is the honest measure of whether anything is actually being resolved.
• Losses from operational error, including missed elections and interest on fails.
• Capacity. Whether a busy day is absorbed or produces a backlog that lasts a week.

What it touches on this site

• The mechanism — clearing and settlement and corporate actions.
• The documents — a contract note and a corporate action notice.
• Who holds it — custody and exchanges and clearing.
• When it goes wrong — 1974, where one side settled and the other did not, and 1995, where the same person traded and reconciled.

How it goes wrong

• A break carried forward. Differences that are small individually and become a position nobody owns.
• A missed deadline. A corporate action election that expires makes the decision for the holder, and it cannot be undone.
• Manual workarounds that become permanent. The spreadsheet built for one bad week is still load-bearing three years later.
• The same person on both sides of a control, which is the oldest failure in the business.

Concepts to master

• Delivery against payment exists because settlement risk is real — see clearing and settlement.
• A fail is a financing position. Whoever did not receive has to fund the gap, and somebody is charged for it.
• Netting changes exposure and not obligation, which is why a clearing house is a different animal from a bilateral trade.
• Operational risk decides more instruments than liquidity and funding combined — see which risk decides.