icma executive education operations certificate programme ... · 4. on day 6 morning, candidates...
TRANSCRIPT
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ICMA Executive Education
Operations Certificate Programme (OCP)
Programme Syllabus
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Contents
1 Introduction p3
2 Accreditation p4
3 Delegate Assessment p4
4 Delegate Communication with ICMA EE p5
5 Background Reading p5
6 Programme Schedule p6
6 Structure of the SOFC Syllabus p7>
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1. Introduction
The Operations Certificate Programme (OCP) is an intermediate level qualification intended for anyone having existing but narrow experience in the financial markets, particularly within the areas of operations (back office) and middle office, and other non-front office areas such as risk management, data management, accounting, collateral management and IT. Attendance of the programme requires an understanding of a number of fundamental and generic operations concepts, including securities operations concepts. Pre-course reading is provided to allow candidates to acquire a certain fundamental layer of understanding of the subject matter. The training programme is designed to provide a framework within which delegates will gain a thorough foundation of understanding relating to the processing of:
Securities o securities trades (equity and debt) o securities financing transactions (repo and securities lending & borrowing) o corporate actions (equity and debt)
Derivatives o OTC derivative trades o OTC Derivative-related collateral management o central clearing of OTC Derivatives and collateral implications.
The programme focuses primarily on operational processing, highlighting 1) the actions that facilitate timely and secure processing, 2) the internal and external processing risks, and 3) the controls necessary to mitigate such risks. The programme covers both conceptual and practical aspects of securities operations, derivative operations and collateral management. Additionally, a number of regulatory initiatives are explained, including the impact on operational processing. Throughout the course delegates can expect a large amount of information to be imparted in a rapid but structured fashion and in a logical sequence of key concepts, beyond which the practical aspects of day-to-day operations tasks will be described. In order to ensure focus and to test the delegates’ understanding of concepts, simulations and exercises will be introduced at numerous points during the programme. Furthermore, the instructor will expand concepts and make connections to prior concepts in order to make the delegates’ understanding as complete as possible.
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Although not a formal prerequisite for any other ICMA training course, the OCP provides useful background study for those taking the following ICMA specialised courses (1), in particular:
Course Type
Course Title
Specialised Corporate Actions Securities Lending & Borrowing Collateral Management
The academic content of the OCP certificate has been created by the ICMA, University of Reading and then reviewed by market practitioners from the operations and middle office areas of financial institutions.
2. Accreditation The OCP is jointly certified by the International Capital Market Association (ICMA) and the University of Reading as a Level II course (2) providing competence in the understanding of the operational functions within the securities industry.
3. Delegate Assessment The OCP certificate incorporates the following structure:
1. Pre-course reading (see Background Reading below) 2. 5-days of instructor led training delivered in multiple sections, including multiple
delegate simulations and exercises across a spectrum of operational concepts 3. 30 minute review sessions at the end of Days 1 – 4, plus a free revision session
on Day 5 afternoon 4. On Day 6 morning, candidates sit a 3-hour examination comprising 75 multiple-
choice questions. Delegates who are successful in passing the examination will receive a certificate granted jointly by ICMA and the University of Reading. To be successful, delegates must correctly answer 45 or more of the 75 questions (i.e. 60%). A ‘distinction’ is awarded to candidates who score 68 correct answers or more (i.e. 90%).
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Delegates should bring to the course a basic calculator for use during the course; such calculators will be permitted during the examination. No other types of calculator are permitted during the examination. Delegates who are not successful in passing the examination on the first attempt may take a re-sit. There is no restriction to the number of re-sits that may be taken.
4. Delegate Communication with ICMA Executive Education
Once registered on the course, delegates will receive the following items: • Hard copy instructions for accessing Blackboard, ICMA EE’s online learning management system. (Delegates will additionally be sent these instructions by e-mail.) • A physical copy of the course book - ‘Securities Operations: A Guide to Trade and Position Management’, author Michael Simmons, publisher Wiley Finance.
5. Background Reading
In order for delegates to gain the necessary understanding in readiness for attending the course, delegates will be provided with a physical copy of the course book.
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6. Programme Schedule Day 1
From To Session
08:30 12:30 The Securities Trade Lifecycle
13:15 13:30 Securities Bookkeeping
13:30 18:00 The Securities Trade Lifecycle Simulation
Day 2
From To Session
International Securities Financing Transactions
08:45 12:45 Repo
13:30 15:00 The Repo Trade Lifecycle Simulation
15:15 16:30 Other Repo Structures
16:45 18:15 Securities Lending & Borrowing
Day 3
From To Session
08:30 16:00 Corporate Actions
16:00 18:00 Regulatory Initiatives Impacting Securities Operations
Day 4
From To Session
08:30 09:45 Derivative Fundamentals
10:00 11:00 OTC Derivatives: An Introduction
11:15 12:45 OTC Derivative Products & Their Processing Characteristics
13:30 15:45 Collateral Management for OTC Derivatives
15:45 18:00 The OTC Derivative Collateral Lifecycle
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Day 5
From To Session
08:30 10:00 The OTC Derivative Collateral Lifecycle (continued)
10:15 11:00 Regulatory Change for OTC Derivatives
11:00 14:15 Central Clearing & its Impact on Collateral Management
14:15 14:30 Central Clearing & Collateral Transformation
15:00 - Free Revision Session
Day 6
From To Session
09:00 12:00 Examination
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7. Structure of the OCP Syllabus
Days 1 – 3: Securities Operations The first 3 days of the course cover various important and challenging subjects, all of which fall under the heading of Securities Operations.
Day 1: The Securities Trade Lifecycle The starting point of the course is the Securities Trade Lifecycle. The primary objective in trade processing is for the trade to settle on its due date. Reaching that objective is not accomplished by the completion of one single task; instead, timely settlement results from a range of consecutive tasks, each of which builds upon the successful completion of the prior task. These tasks are collectively known as the Securities Trade Lifecycle. which a firm must abide on a daily basis, in order for its exposures to be mitigated.
Orders
Purpose
Who Issues Orders?
Order Content
Order Processing
Trade Execution
Order-Driven Markets
Quote Driven Markets
Exchange-Traded vs OTC
Trade Capture (Front Office)
Capture Methods
Components
EU Commission: New Settlement Cycles
Speed
Accuracy
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Trade Capture (Operations)
Implications of Successful Capture
Facilitating Successful Capture
Identifying Failed Capture
Implications of Failure to Capture
Reasons for Failed Capture
Trade Enrichment
Purpose
What’s Added to Basic Trade Details
Achieving Automated Enrichment
Importance of Static Data
Trade Agreement
Purpose
Methods
Trade Confirmation (manual, electronic),
Trade Affirmation (Oasys Global),
Implications of Failing to Agree
Settlement Instructions
Purpose
Instruction Types
Instruction Methods
Instruction Content
Time-Zone Differences
Implications of Failing to Instruct
Risks
Settlement Instruction Statuses
Purpose
Status Types & Meaning
Corrective Action
Root Causes of Unmatched Instructions
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Failed Settlement
Definition
Impacts
Causes
Prevention
Partial Settlement
Enforcing Settlement
EU Commission: New Fining & Buy-In Rules
Trade Settlement
Definition
Causes of Successful Settlement
Full Settlement
Partial Settlement
Securities Only Settlement
Cash Only Settlement
Gross versus Net Settlement
Updating Books & Records
Definition
Purpose
Method of Update
Impact of Successful Update
Reconciliation
Definition
Purpose
Types
Methods
Risks
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Day 1: Securities Bookkeeping If an Operations professional is to understand the processing nuances of a variety of transaction types, that task will be made considerably easier if the fundamental method of accounting for such transactions is understood. This is a structured method of determining/analysing the implications of processing a range of transaction types including buy/sell, repos, securities lending & borrowing, incoming & outgoing collateral, corporate actions.
Securities Bookkeeping
Definition & Purpose
Importance of Accurate Books & Records
Double-Entry Bookkeeping
When Entries Must be Passed: Trades
Application in Different Transaction Types
Day 1: The Securities Trade Lifecycle Simulation The securities trade lifecycle simulation involves all delegates, where each delegate forms part of a trading firm; there are multiple trading firms. After each firm decides upon its internal structure, they will execute securities trades with all other firms, following which each component of the trade lifecycle will be undertaken by each firm, for each trade they have executed. This simulation is extremely interactive requiring a high level of internal teamwork and communication with external parties. The simulation is scheduled to run for a minimum of 4 hours. The purpose of the simulation is for delegates to confirm/increase their understanding of each securities trade lifecycle component, to appreciate the inter-relationships between each component, and to understand the positive and negative knock-on effects of their actions, the actions of their colleagues’ and the actions of counterparties and CSDs. The purpose also includes having the delegates working in a close-knit team, to appreciate the importance of good and timely communication.
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Day 2: International Securities Financing Transactions Introduction: the practice of securities financing utilises securities held by a firm to 1) secure a cash borrowing or to 2) lend such equities and bonds in return for additional revenue. During the lifetime of a securities financing trade, the daily movement in the market value of the securities involved causes exposures that each firm must mitigate. Such transactions cause multiple securities &/or cash movements during their lifetime, all of which must be settled in a timely manner if risks are to be mitigated.
Day 2: Repo For many sell-side firms, the funding costs of maintaining proprietary positions is a reality that must be faced constantly, therefore keeping funding costs to a minimum is paramount if a firm is to maximise its trading profits. The borrowing of cash versus bonds given as collateral is a popular method of minimising funding costs.
The Instrument
Transaction Structure and Mechanics
Market Conventions
Principal Purposes and Drivers
Terminology
Collateral Issues
Valuation of Collateral
Initial Margin/Haircut
Marking-to-Market & Margin Maintenance
Right of Substitution of Collateral
Custody & Settlement (Delivery, HIC, Tri-Party)
What Happens in a Default
Failure to Deliver Collateral
Legal Documentation (GMRA)
Key Features
Legal Structure: Title Transfer
Comparison with Secured Loans
Economic Effect: Borrowing and Lending
Treatment of Collateral Income
Credit and Liquidity Risk
Implications for Accounting of Repo (Repo 105)
Basic Tax Issues
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Synthetic Repo
Specials and GC Repo
General Collateral
GC repo Rate & Spreads to Unsecured
Specials
Specials Drivers, Patterns of Specialness
Comparison with Securities Lending
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Day 2: The Repo Trade Lifecycle Simulation
The repo trade lifecycle simulation involves all delegates, where each delegate forms part of a trading firm. The basic details of a repo trade are provided to the delegates, following which each firm is required to determine the calculations and other actions necessary to achieve timely settlement of the trade 1) at the start of the trade, 2) during the lifetime of the trade, and 3) at the close of the trade. This simulation involves a large number of calculations (designed to prove conceptual understanding) and is scheduled to be run for between 60 – 90 minutes. The purpose of the simulation is for delegates to confirm/increase their understanding of each repo trade lifecycle component, to appreciate the inter-relationships between each component, and to understand the positive and negative knock-on effects of their actions. The purpose also includes having the delegates working in a close-knit team, to appreciate the importance of good and timely communication
The Repo Trade Lifecycle Overview Opening Leg Settlement
Settlement of Cash versus Collateral
Throughout Life of Transaction
Introduction
Marking-to-Market
Bond Accrued Interest
Repo Interest to Date
Margin Calls
Collateral Substitution
Income Payments
Corporate Actions
Closing Leg Settlement Updating Books & Records
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Day 2: Other Repo Structures A variety of structures fall within the heading of ‘repo’, and this section introduces a number of the most common types.
Other Repo Structures
Repurchase Agreements
Sell/Buy-Back (and forward price)
Floating Rate Repo
Open Repo
Forward Repo
Term Repo
Collateral Up/Downgrade
Collateral Transformation/Liquidity Swaps
Tri-party Repo
o Structure
o Basic Operations
o Collateral Selection and Optimisation
o Re-use Facilities
o European vs US Tri-party
Market Structure
o Size and Composition of the Market
o Electronic Trading
o Central Counterparties
o GC Financing/Pooling
o Repo Trade Repositories
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Day 2: Securities Lending & Borrowing For both buy-side and sell-side firms, the equities and bonds they own can be made to generate further revenue if the firm is prepared to lend such securities. Other firms need to settle sales of securities in a timely fashion, and so such firms become securities borrowers. In order to mitigate the securities lender’s risk, the securities borrower must provide collateral in the form of cash or other securities.
The Instrument
Transaction Structures
Terminology
Principal Purposes & Drivers (Lending & Borrowing)
Legal and Economic Structure
Lender’s Right of Recall
Borrower’s Right of Return
Indemnification by Agent Lenders
Borrowing Fees
Securities Lending versus Repo
Market Structure
Size and Composition of the Market
End Users
Intermediaries
Collateral Issues
Initial Margin
Margin Maintenance
Cash Collateral Management
Collateral Delivery
Custody and Settlement (Bilateral & Tri-party)
Treatment of Collateral Income
Corporate Actions
Voting Rights
What Happens in a Default
Failure to Deliver Collateral
Legal Documentation (GMSLA)
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Day 3: Corporate Actions Equity and bond positions (and trades) are impacted by corporate action events that are either scheduled or announced by the issuer; trading positions, settled positions and open trades are all subject to adjustment. This topic contains numerous points of risk which many institutions have experienced to their cost. Knowledge of securities and their processing is incomplete without an understanding of this challenging topic. Numerous mini-calculation exercises are included within the topic, in addition to two major calculation exercises which are scheduled to run for approximately 30 minutes each.
Fundamental Concepts
Definition
Purpose
Issuer’s Objectives
Event Initiation
Event Classification
Ultimate Impact
Responsibilities of a Corporate Actions Dep’t
Major Processing Steps
Major Risks
Corporate Actions Lifecycles Overview
Processing Lifecycle Characteristics of:
o Mandatory Events
o Mandatory with Options Events
o Voluntary Events
:
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Event Type Characteristics & Impacts
Focus on Numerous Event Types, including:
o Cash Dividends
o Currency Option Dividends
o Dividend Reinvestment Plans
o Fixed-Rate & Floating-Rate Coupon Payments
o Bonus Issues
o Stock Splits, Reverse Splits
o Odd-Lot Offers
o Bond Conversions
o Final Maturity
o Early/Partial/Voluntary Redemptions
o Rights Issues
The Generic (Mandatory Event) Lifecycle: Overview
Overview of Each Major Step in the Mandatory Event Lifecycle, namely
o Declaration of Event Terms
o Capturing Event Terms
o Ascertaining Entitlement
o Informing Relevant Parties
o Calculating Resultant Entitlement
o Updating Books & Records #1
o Receiving & Crediting Resultant Entitlement
o Updating Books & Records #2
Tax on Income Events: Overview
Withholding Tax
Domestic Tax
Internal/External Securities Position Management
Over-Taxation
Tax Returns to Tax Authorities
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Optional & Voluntary Event Lifecycles; Overview
Characteristics of Optional & Voluntary Events
Differences vs the Mandatory Event Lifecycle
Associated Management Implications
Event Terms
Requesting Election Decisions
Monitoring Outstanding Election Decisions
Managing Incoming Election Decisions
Issuing Outgoing Election Instructions
Calculating Resultant Entitlement
Typical Deadlines
Processing Risks & Controls
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Day 3: Regulatory Initiatives Impacting Securities Operations Since the 2008 financial crisis, a number of regulatory measures have been introduced which have impacted primarily the front office of financial institutions. However, further regulatory measures specifically relating to securities, which will have a direct bearing on the activities managed by the securities operations department, are scheduled to come into effect from 2014. Three of such initiatives will be covered in this section, at overview level
CSD Regulation (CSDR) Overview
Objectives
Background
Key Elements
Impact
Target2 Securities (T2S) Overview
Definition
Current Issues
Objectives
Key Elements
Benefits
Impact
Foreign Account Tax Compliance Act (FATCA) Overview
Definition
Current Issues
Objectives
Key Elements
Impact
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Days 4 – 5: Derivative Operations and Collateral
Management
The latter part of the course introduces various important and challenging subjects including derivatives, OTC derivatives, collateral management and central clearing.
Day 4: Derivative Fundamentals Derivatives have become an extremely important group of products within the financial services industry. This section introduces the subject of derivatives, covering 1) the similarities and differences between exchange-traded derivatives and OTC derivatives, and 2) the elementary characteristics of the main types of derivative.
Derivative Fundamentals
Definition & Purpose
The Derivatives Marketplace
o Exchange Traded versus OTC Derivatives
o Derivative Exchanges
Basic Derivative Types
o Futures
o Options
o Swaps
Investment Appeal of Derivatives
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Day 4: OTC Derivatives; An Introduction
The group of products known as OTC Derivatives has become a major aspect of financial services; from a general Operations viewpoint, this is regarded as a specialist area. This section focuses on the common features of OTC derivative products and trades, and identifies the similarities and differences compared with the equivalent for securities trades. Additionally, the requirement for legal documentation (between the two trading parties) is explained, including how the operations department is impacted.
OTC Derivatives; An Introduction
Structural Aspects of OTC Derivatives
o Definition
o The OTC Derivative Product
o Parties
o Tenure
o Notional Principal Amount
o Rates
o Dates
o Settlement
o Exiting
Legal Documentation
o ISDA Master Agreement
o The Schedule
o Credit Support Annex
o Trade Confirmation
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Day 4: OTC Derivative Products & Their Processing Characteristics
Two streams of operational activity stem from trading in OTC derivatives, namely trade processing and collateral processing. This sub-section focuses more specifically on particular OTC derivative products, and explains the basic purpose of each product prior to describing their particular characteristics, including their trade processing, settlement and operational requirements (prior to describing the associated collateral processing activity). Delegates have an opportunity to prove their understanding via exercises relating to the products covered.
OTC Derivative Products & Their Processing Characteristics
Introduction
For each product listed below, the following aspects will be covered:
o Product Definition & Purpose
o Structure & Characteristics
o Interest & Premium Calculations
o The Trade Lifecycle
Example OTC Derivative Products
o Interest Rate Swaps
o Credit Default Swaps
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Day 4: Collateral Management for OTC Derivatives Price movements in OTC derivative trades give rise to the requirement to give and/or take collateral, and this practice has gained a very high profile since the 2008 financial crisis. The management of collateral relates to mitigation of exposures in OTC derivatives (and other products) and involves a defined series of processing steps. To date, collateral management has related to direct exposure with bilateral counterparties, but this will change from 2013-14. This section introduces collateral management relating to OTC derivatives, and in particular describes the rules by which a firm must abide on a daily basis, in order for its exposures to be mitigated.
Collateral Management for OTC Derivatives
Collateral Concepts for OTC Derivatives
o Risks in OTC Derivatives
o Contractual Obligations
o How Exposures Arise in OTCD
o Purpose of OTCD Collateral
o Collateral Differences vs Repo & SLB
o Increased Focus on Collateral
o Eligible Collateral in OTCD
o Value of Cash & Bond Collateral
Collateral Impact on Regulatory Capital: Overview
OTCD Collateral Lifecycle: Overview
Cash & Bond Collateral for OTC Derivatives
Credit Support Annex
o Definition & Purpose
o Base Currency
o Eligible Credit Support
o Independent Amount
o Threshold
o Minimum Transfer Amount
o Rounding
o Valuation & Timing
o Valuation Date & Time
o Notification Time
o Exchange Date
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Days 4 - 5: The OTC Derivative Collateral Lifecycle The calculation of exposures and the giving/taking of collateral relating to OTC
derivatives is a daily activity for many firms today. The collateral lifecycle is a
defined series of steps that typically results in the need for a firm to either give
collateral to, or to take collateral from, a counterparty.
Furthermore, as collateral may be in the form of cash or securities, deliveries and
receipts of securities can occur for reasons completely dis-associated with securities
trading. It is therefore important that an operations professional is aware of the
underlying reasons for such incoming & outgoing movements of securities.
Additional challenges of giving &/or taking securities collateral is the potential reuse
of such collateral (where permitted) and the impact on income processing.
This section incorporates a major simulation of 60 – 90 minute duration.
The OTC Derivative Collateral Lifecycle
Introduction
o The Collateral Lifecycle: Overview
Pre-Trading
o Legal Documentation
o Static Data
Trading
o Trade Execution
o Trade Capture
o Trade Confirmation
Throughout Lifetime of Trade
o Portfolio & Exposure Reconciliation
Definition & Purpose
Benefits
Method
Causes of Discrepancies
Discrepancy Resolution
o Marking-to-Market
Definition & Purpose
Method
o Collateral Call Calculation
Definition & Purpose
Frequency
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Uniqueness of Counterparty Arrangements
Determining Factors
o OTCD Collateral Calculation Simulation
o Making & Receiving Collateral Calls
Communicating Collateral Demands
Collateral Demand Deadlines
Receiving Collateral Demands
Issuing Collateral Demands
Agreeing Collateral Demands
Settling Cash & Bond Collateral
Holding Collateral Received
Title Transfer vs Security Interest
Reuse of Bond Collateral
o Collateral Substitution
Definition & Purpose
Circumstances Causing Substitution
Settling Collateral Substitutions
o Income Payments
Collateral Reuse vs Non-Reuse Scenarios
Impact on Collateral Giver & Taker
Trade Termination
o Termination on Scheduled Maturity Date
o Impact on Collateral
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Day 5: Regulatory Change for OTC Derivatives The introduction (during 2013-14) of an entirely new set of regulatory measures relating to OTC derivatives has an extreme impact on ongoing counterparty exposures, which in turn impacts collateral management which in itself is designed to mitigate risk. The implications, both from a trading and an operational perspective, are far-reaching in a number of senses, and will impact both sell-side and buy-side firms. This section introduces the background to such regulatory changes, and provides overviews of the main areas of change.
Regulatory Change for OTC Derivatives
Introduction
o Required Regulatory Changes
o Background to the Changes
o The European Commission: Press Release
o Dodd-Frank Wall Street Reform: Summary
Trading on Exchanges or Electronic Trading Platforms: Overview
Central Clearing: Overview
Capital Requirements: Overview
Trade Repositories: Overview
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Day 5: Central Clearing & its Impact on Collateral From an operations viewpoint, the greatest impact of the introduction of mandatory central clearing for OTC derivatives relates to the impact on collateral. This section focuses on how central clearing will affect both sell-side and buy-side firms, and how both trade processing and collateral processing will be impacted. Delegates will have an opportunity to prove their understanding of this new area via a trade netting exercise.
Central Clearing & its Impact on Collateral
Central Clearing Primary Concepts
o Trade Netting
o Capital Benefits
Central Counterparty Membership Structure
o Central Clearing for Clearing Members
o Central Clearing for Non-Members
Multiple Central Counterparty Implications
o Interoperability
o Netting & Capital Implications
Risk Management within Central Counterparties
o Collateral Requirements
o Eligible Collateral
o Reuse of Bond Collateral
Operational Implications of Central Clearing
Communicating New Trades to Central Counterparties
Cleared versus Uncleared Trades
Legacy Trades
o Backloading
o Netting & Capital Benefits
Legal Documentation
Central Counterparty Supervision
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Day 5: Central Clearing & Collateral Transformation It is anticipated that many buy-side firms will not possess assets that are eligible from a
central clearing perspective. This situation provides sell-side firms with an opportunity
to extend their existing services to their clients through execution of repo and/or
securities lending trades, in order to transform existing assets into central clearing
eligible assets.
This section focuses on how such trades may be executed.
Central Clearing & Collateral Transformation
Definition & Purpose
Collateral Transformation Methods
o Trade with a Clearing Member
o Trade with a Third Party
o Trade with a Custodian or Prime Broker
Operational Implications of Collateral Transformation
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Day 5: Exam Revision This is a ‘free’ session where each delegate can choose exactly how they wish to use the time. The instructor will be available for questions and answers for the entire period. Where there are a number of delegates expressing interest in re-visiting particular topics, the instructor will organise timed sessions where individual delegates may choose to attend (e.g. ‘Interest on Bank Accounts’ session will be run 14:30 – 14:45, and ‘Accrued Interest Calculation’ will be run 14:45 – 15:00). This is designed to make the most efficient use of the delegates’ available time.
Day 6: Exam The exam contains 75 multiple-choice questions, to be answered within 3 hours. It will be run under formal exam conditions, with the usual exam rules applying.