What Is Front Office Trading?

Transaction confirmation ^[1] (trade confirmation) is an important part of the transaction process. It is not only a legal contract between counterparties, but also contains many key information about the transaction, such as volume, price, authorization, and settlement instructions.

Trade confirmation is an important part of the transaction process. It is not only a legal contract between counterparties, but also contains many key information about the transaction, such as volume, price, authorization, and settlement instructions. This link can be either automatic (electronic) or manual. Due to the delay in manual confirmation, transactions may fail, which increases transaction costs and risks. The need for electronic transaction confirmation arises at the historic moment. Due to the regulations of the Securities and Exchange Commission (SEC) in the United States, most securities transactions are confirmed electronically. And the scale of electronic transaction confirmation in the international OTC derivatives market is also growing and growing ^[2]

Post-transaction processing usually includes three stages: pre-clearing, clearing, and settlement. The transaction confirmation link is the main content of the liquidation preparation stage. Although this term is widely used, its definition is slightly different in different studies and applications.

Based on the recent developments of several definitions and transaction confirmation arrangements, the core process of transaction confirmation is that both parties to the transaction verify the transaction details and any regulatory legal documents one by one. The verification process can provide transaction details and legal documents through one party. Confirmation by the other party (this process is called "affirmation"), or the two parties can submit their own transaction records for confirmation by the other party (this process is called matching), and finally a transaction confirmation is formed ) As the final record of the transaction ^[1]

The transaction confirmation can be achieved by fax, telephone, email, messaging systems (such as Bloomberg and Markit Connex) and electronic trading platforms. The transaction confirmation can be in paper or electronic form.

There are two modes of transaction confirmation: affirmation model and matching model. The former is a way for the front desks of both parties to agree on a single transaction record. We can call it the front desk confirmation mode: the latter allows the central and Taiwanese personnel to enter transaction information into the matching system. Transaction records (each of the two parties in the transaction are generated by the internal systems of the two parties in the transaction), we call it the mid-backstage confirmation mode.

For paper-based confirmation transactions, the front-end confirmation mode is more commonly used in the following two situations: one is between the dealer and the customer, and the other is between the dealers in the CDS product transaction confirmation. On the contrary, there are many mid- and back-office confirmation modes used by traders in transaction confirmation of IRS products. In the front desk confirmation mode, front desk personnel must enter transaction information into the transaction confirmation system, or confirm transaction information sent by the counterparty through the system. Although this model eliminates errors that may occur during the transmission of transaction information from the front desk to the middle stage, this process requires front desk traders to undertake additional work and requires modifications to the company's IT system. Because at the beginning of the transaction cycle, the parties to the transaction agree to the electronic record of the transaction details, the possibility of modifying the transaction or rejecting the transaction is greatly reduced, so transaction confirmation is often completed quickly. In fact, 99% of the confirmation time for transactions confirmed through the SwapsWire platform is T + 0. The problem with this model is that it requires changes to existing systems and processes for handling OTC transactions. Traditionally, after a transaction is reached at the front desk, the transaction information is passed to the middle desk for further processing. In contrast, the mid-backstage confirmation mode allows mid-stage personnel to enter transaction information into the matching system, which is the same as the traditional post-processing process. Before the information enters the central matching system, there are two transaction records (each of the two parties is generated by the internal system of the two parties). The timeliness and accuracy of the transaction information input by the two parties into the matching system have become the key factors affecting the speed of final transaction confirmation ^[3]

Judging from the development history of mainstream OTC derivatives transaction confirmation platforms in the world, the following trends can be summarized:

1. The scale of electronic transaction confirmation is rising rapidly. The reasons include both the benefits of electronicization itself and the artificial impetus. The benefits of electronicization are firstly reducing costs, and secondly, reducing the lag time of confirmation and thus reducing risks. According to ISDA's survey, in the electronic confirmation, 68% of the interest rate derivatives are confirmed on the day of the transaction (T + 0), and 100% on the next +1 day. In September 2005, the New York Fed convened a group of the major international brokers to work together to improve post-trade processing procedures. They played a significant role in the electronic confirmation of transactions and the establishment of the TIW platform under CC. From the situation of 2005-2006, it is seen that the number of transactions confirmed by SwapsWire, Deriv / SERV and Swift Accord in the processing of interest rate derivative transactions has doubled. By 2009, the proportion of electronic transaction confirmations had an absolute advantage.

2. The proportion of transaction parties participating in the affirmation process has gradually increased. The ISDA survey in 2009 showed that the proportion of members participating in the identification process among the member institutions participating in the investigation is increasing, and almost all major institutions will conduct transaction identification in some way. There are two ways to do this: telephone and electronic messaging. The latter method is used more than the former, and this trend has expanded in 2009 compared to 2008. And it is particularly obvious in large institutions. From the perspective of the size of the transaction parties, it is easier for large institutions to choose electronic confirmation methods than small and medium institutions ^[2] .

3. In order to improve the efficiency of liquidation, same day affirmation (SDA) is receiving more and more attention. SDA refers to the process of completing the transaction confirmation on the day of the transaction. Practice has shown that SDA helps to shorten the settlement cycle and lower the risk exposure to improve the settlement efficiency. According to an Omgeo survey of 46 countries on its platform with an average of 24 million transactions per month, SDA has become a key factor in improving settlement efficiency. Countries and regions with SDA higher than 90%, such as India, Taiwan, Hong Kong, Japan, Singapore and South Korea, have 26% higher settlement efficiency than Brazil, Italy, South Africa and the United States with SDA lower than 70%. Mark itServ, currently established in 2009, can provide one-stop same-day confirmation services.

In summary, as an important part of the post-processing process, the electronic transaction confirmation method has been promoted and developed due to its fast, simple and efficient characteristics, effectively reducing transaction costs and transaction risks, and improving post-processing procedures. . China's foreign exchange, currency, bond market and derivative transaction volume have continued to grow. Whether for market intermediaries and clearing institutions or financial institutions, the smooth realization of confirmation and matching automation has become an important step to complete transaction settlement quickly and efficiently. Moreover, under the pressure of profit, financial institutions also need a set of intelligent solutions applicable to the entire institution to complete as many automated transactions as possible in order to save transaction time, reduce transaction costs, and reduce transaction risks.