ICMA Executive Education. Operations Certificate Programme (OCP) Programme Syllabus

Transcription

1 ICMA Executive Education Operations Certificate Programme (OCP) Programme Syllabus Page 1

2 Contents Introduction Accreditation Delegate Assessment Delegate Communication with ICMA Executive Education Background Reading Programme Schedule Structure of the OCP Syllabus... 9 Days 1 3: Securities Operations... 9 Day 1: The Securities Trade Lifecycle... 9 Day 1: Securities Bookkeeping Day 1: The Securities Trade Lifecycle Simulation Day 2: International Securities Financing Transactions Day 2: Repo Day 2: The Repo Trade Lifecycle Simulation Day 2: Other Repo Structures Day 2: Securities Lending & Borrowing Day 3: Safe Custody Day 3: Corporate Actions Days 4 5: Derivative Operations and Collateral Management Day 4: Derivative Fundamentals Day 4: OTC Derivatives; An Introduction Day 4: OTC Derivative Products & Their Processing Characteristics Day 4: Collateral Management for OTC Derivatives Days 4-5: The OTC Derivative Collateral Lifecycle Day 5: Regulatory Change for OTC Derivatives Page 2

3 Day 5: Central Clearing & its Impact on Collateral Day 5: Central Clearing & Collateral Transformation Day 5: Exam Revision Day 6: Exam Page 3

4 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. 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. 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, in particular: Page 4

5 Course Type Specialised Course Title 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. 1. Accreditation The OCP is jointly certified by the International Capital Market Association (ICMA) and the University of Reading as a Level II course providing competence in the understanding of the operational functions within the securities industry. 2. 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 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%). 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. Page 5

6 3. 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 .) A physical copy of the course book - Securities Operations: A Guide to Trade and Position Management, author Michael Simmons, publisher Wiley Finance. 4. 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. Page 6

7 5. 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 09:45 Safe Custody 10:00 18:00 Corporate Actions 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 Page 7

8 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 08:00 11:00 Examination Page 8

9 6. 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. Orders Purpose Who Issues Orders? Who Issues Orders? Order Content 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 Page 9

10 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 Page 10

11 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 Page 11

12 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. Page 12

13 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 Page 13

14 Synthetic Repo Specials and GC Repo General Collateral GC repo Rate & Spreads to Unsecured Specials Specials Drivers, Patterns of Specialness Comparison with Securities Lending Page 14

15 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 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 Page 15

16 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 Page 16

17 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) Page 17

18 Day 3: Safe Custody Some investment banks choose to offer their clients the service of holding the clients securities (and possibly cash) on the clients behalf; by providing this service, the bank becomes a custodian to the client. This in turn introduces a range of risks to the bank, from verifying incoming settlement instructions to the processing of optional corporate actions. Safe Custody Definition & Purpose Service Attributes Securities & Cash Movement Types Legal Agreements Authenticating Client Instructions Structure of Safe Custody Accounts Income & Corporate Actions Maintaining Safe Custody Books & Records Page 18

19 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 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 Page 19

20 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 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 Page 20

21 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 Page 21

22 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 Page 22

23 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 Page 23

24 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 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 OTC D 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 Page 24

25 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 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 Uniqueness of Counterparty Arrangements Determining Factors o OTCD Collateral Calculation Simulation Page 25

26 o o 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 Collateral Substitution Definition & Purpose Circumstances Causing Substitution Settling Collateral Substitutions 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 Page 26

27 Day 5: Regulatory Change for OTC Derivatives The introduction (during ) 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 buyside 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 Page 27

28 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 Page 28

29 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 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. Page 29