Fundamentals of Securities Operations

Transcription

1 Fundamentals of Securities Operations Mark Alexander CIO and Head of Global Wealth and Investment Management Technology & Operations Bank of America Merrill Lynch March 9, 2011

2 Operations Industry Framework Clients Global Markets Asset Managers Hedge Funds Pensions / Insurance Financial Institutions Sovereigns Municipalities Corporations Wealth Management UHNW Individuals HNW Individuals Mass Affluent Affluent Mass Market Institutions Financial Intermediaries Market Access Providers Brokers Dealers Underwriters Back Office Services Banks Custodians BPOs Issuing, Paying, Transfer, and Calculations Agents Wealth Management Providers Full-Service Brokers Investment Advisors Private Banks / Trust Online / Discounters Mutual Funds Market Infrastructure Trade Execution Exchanges Trading Networks OTC Trading Clearing, Settlement and Custody Central Counterparties Central Securities Depositories Service Providers Pricing, Market and Reference Data Providers

3 Global Markets Fee Demographics Fee Pools ~$300B Mortgages & Securitized Products 7% Commodities 5% Underwriting 14% Credit 16% Equities 20% Rates & Currencies 38%

4 Wealth Management Demographics Wealth Management Market Size (HNWIs) ~$39T Asia Pacific 25% North America 27% Middle East & Africa 7% Latin America 17% Europe 24% U.S. Financial Assets by Wealth Segment Mass Market 7% Mass Affluent 11% Affluent/HNW 82%

5 Global Markets: Key Broker/Dealer Services Capital Raising Product Innovation Structured Products Complex Derivatives etc. Research/Investing Advice Market Making / Trade Execution Pricing Mechanism / Liquidity Securities and Derivatives Principal Agency / Riskless Principal Clearing / Settlement - Mostly Delivery Versus Payment (DVP) Prime Brokerage & Financing Middle / Back Office Custody Client Reporting Stock Loan / Borrow Repo / Reverse Repo Synthetic Financing FX / Derivatives

6 Wealth Management: Key Services Basics Trade Execution - Agency / Riskless Principal Clearing / Settlement Custody Margin Financing Client Reporting Value-Added Financial Planning Wealth Structuring Banking, Lending and Insurance Managed Solutions Family Office Services Complex Financing Solutions Philanthropic Services Institutional Retirement and Benefit Plans Small Business Services

7 Types of Securities and Features Equities Common Stock Preferred Stock Exchange Traded Funds ADRs / GDRs Corporates Bonds / Notes Investment Grade / High Yield Structured Products Municipals General Obligations Revenue Bonds Special Purpose Money Markets Certificates of Deposit Commercial Paper Sovereign/Government U.S. Treasuries Agency Securities Non-U.S. Governments Emerging Markets Features Debentures (Unsecured) Subordinated Secured Bearer vs. Registered Bullets vs. Amortizing Convertible / Exchangeable Fixed vs. Structured Principal Principal Protected Inflation Protected Floating vs. Fixed Rate Zero Coupon vs. Income Bonds Strips Interest Accrual Rules Callable / Putable Refunding Sinking Fund Market-Linked Step-Up / Down Attached Warrants etc. Securitized Debt Mortgages (PassThrus / CMOs) Asset-Backed Collateralized Debt Obligations Mutual Funds Loads No-Loads Share Classes Open-Ended Closed-End Listed Options/Futures Puts Calls Single Name / Indices Securities / Commodities Financing Securities Borrowed / Loaned Repos / Reverse Repos

8 Clearing Corporations/Central Counterparties Roles: Trade Comparison Trade Netting Trade Guarantee / Novation Risk Management Margining Audit Trail Clearing Alternatives: Continuous Net Settlement (CNS) Net Settlement / Balance Orders Trade-for-Trade Other Services: ACATS Mutual Funds Features Select CCPs U.S. NSCC FICC OCC CME Non-U.S. Eurex LCH.Clearnet EMCF Euro CCP

9 Central Securities Depositories Features Roles: Immobilization of Physical Certificates Book Entry Settlements Liquidity / Credit Management Collection / Disbursement of P&I Payments Notification / Processing of Corporate Actions Processing of Calls / Redemptions Transfers / Re-registration Safekeeping Physical Securities Key Features/Services: DVP Free Receipts and Deliveries Fail and Repo Tracking Fail Balancing Claims Processing (Interest) Select CSDs North America DTC Fedwire CDS Non-U.S. Euroclear + Clearstream Local CSDs

10 Life Cycle of a Typical U.S. Equity Trade Client Buy Order Confirm Broker / Dealer Order / Execution Matching NYSE / NASDAQ / ECNs NSCC Locked-in Trade Netted Settlement Instructions Broker / Dealer Sell Order Confirm Client DTCC Book Entry Receive Book Entry Delivery

11 CNS in Action Broker/Dealer A Buy 100 IBM Buy 200 IBM Sell 500 IBM Net Sell 200 IBM Broker/Dealer B Sell 100 IBM Buy 200 IBM Net Sell 100 IBM Broker/Dealer C Sell 200 IBM Sell 200 IBM Buy 500 IBM Net Buy 100 IBM Obligations marked to market with theoretically one net settlement per security per Broker / Dealer per day Money settlements are further netted across all securities with adjustments for margin calls, fail marks-to-market and other activity to create one net money settlement per Broker / Dealer per day

12 Institutional Client Life Cycle of a Typical U.S. Equity Institutional Trade Order Average Price Trade Allocations Broker / Dealer Order Execution (Multiple Fills) Matching NYSE / NASDAQ / ECNs NSCC Confirms Settlement Messages Custodian A Custodian B Custodian C Settlement Messages DTCC

13 Institutional Client Life Cycle of a Complex Cross-Border Equity Trade Order VWAP Allocations Broker / Dealer Order / Execution Order / Execution Non-US Broker / Dealer Non-US Market Makers Local Exchange CCP Alternative Trading Facility CCP Confirms Matching / Settlement Messages Settlement Messages Master Custodian Sub Custodians Local CSD

14 Collateralized Financing Transactions Transactions Reverse Repos / Repos Securities Borrowed / Loaned Delivery vs. Payment Triparty Hold-In-Custody Synthetic Derivatives Product Categories Sovereigns Agencies Mortgages/ Asset-Backed Securities Corporates Equities Terms Overnight Term Open Flex Features Fixed vs. Variable Interest Rates Collateral Cash Securities Letters of Credit General Collateral vs. Special Issues Cross-Product Substitutions Credit Initial Margin (Haircuts) Mark-to-Market & Margin Calls

15 Repos/Reverse Repos Principal Money Securities Repo Counterparty Reverse Repo Counterparty Securities Principal Money Plus Interest

16 OTC Derivatives Transaction Types Swaps Options Futures Forward Rate Agreements Caps / Floors / Collars Product Categories Rates Currencies Credit Equities Commodities Features Notional / NPV Terms and Conditions Fixed vs. Floating Total Return Index vs. Single Name Amortizing Puts / Calls American vs. European Swaptions / Captions Barriers Knock-ins / Knock-outs Collateralized etc.

17 Simple Interest Rate Swaps Illustration Bank S&L Asset LIBOR +1/2% Liabilities 10-Year 4% Pay LIBOR Receive 5% Broker/Dealer (Intermediary) Pay 5% Receive LIBOR Asset Fixed Rate 6% Liabilities MMDA at T Bill +1/2% * Illustration excludes Broker/Dealer spread

18 Life Cycle of a Typical OTC Derivatives Trade Exchange ISDA Agreements with CSAs Negotiate Contract Terms (Price, Collateral, Margin, etc.) Exchange/Sign Documentation (Confirms)/Match Terms * Broker / Dealer Matching Service Providers (Markitwire, DTCC) Client / Exchange Upfront Fees / Premiums (where applicable) Counterparty Lifecycle Events / Payment Resets Service Providers (DTCC) Mark-to-Market Margin / Collateral Movements * CCPs (CME, ICE, LCH) clear certain interest rate and credit derivatives

19 Operations Functions in Broker/Dealers Client Onboarding Trade / Trader Support Pre-Settlement Processing Cash / Security Settlements Custody Books and Records Margin / Collateral Management Operations Risk Management Reference / Market Data Client Reporting Client Services Specialized Product Support

20 Functions in Broker/Dealers Client Onboarding Account Opening Anti-Money Laundering Patriot Act Office of Foreign Assets Control Account Documentation Contract Documentation Pre-Settlement Processing Trade Figuration and Enrichment Trade Clearance Allocations Confirmations (Securities & Derivatives) Pairoffs / Bulking / Netting Custodial Matching Payment Resets (OTC Derivatives) Life Cycle Event / Trigger Management (Derivatives) FX Funding Trade/Trader Support Order Management Trade Execution Matching / Balancing Trade Verification Position / P&L Balancing Cash/Security Settlements Securities Settlements (DVP and Free) Cash Receipts / Disbursements Funding / Settlement Liquidity Management ACATS / Broker Transfers Financing Desk Coordination (Reverse Repo / Securities Borrow) Fails Management Claims Processing Network Management Wealth Management Banking Services Visa, Checking, ACH, Wires, Deposits, Loans, Sweeps

21 Functions in Broker/Dealers Custody Corporate Actions Notifications Corporate Actions Election Management Interim Accounting Income / P&I Entitlement Processing Tax Withholding / Collections Transfers / Re-registrations Physical Securities Processing / Safekeeping (Vault) Security Deposits / Withdrawals Specialty Asset Services Books and Records External Reconciliations (Cash / Nostro, Box / Depot) Internal Reconciliations (Inter / Intra- Company, Suspense, Fails) Receivable / Payable Tracking Stock Record Maintenance Customer Account Bookkeeping Fees and Billing Margin/Collateral Management Reg T Initial Margin and Cash Payments NYSE Rule 431 Margin Financing Transactions Margin Forward Trade Margin (e.g., Mortgage TBAs) Central Counterparty Collateral Posting OTC Derivatives Margin / Collateral Management Operations Risk Management Management Reporting and Metrics SEC Rules 15c3-1 and 15c3-3 Reporting Client Money Compliance (Including SEC Rule 15c3-3 Reserve Formula) Sec Rule 15c3-3 Possession or Control Compliance Escheatment (Abandoned Property) Fraud Management Systems Implementations / Testing

22 Functions in Broker/Dealers Reference/Market Data Product Data Maintenance Client Data Maintenance Standing Settlement Instructions Maintenance Pricing Client Services Call Centers Wealth Management Branch Liaison / Support Institutional Client Relationship Management Prime Brokerage Client Services Client Reporting Statements Tax Reports Performance Reporting / Client Reviews Fails (Institutional Clients) Derivatives Pricing / Client Valuations Print and Mail Specialized Product Support Mutual Funds Managed Solutions Insurance Alternative Investments Mutual Funds Transfer Agency / Sub- Accounting Trust Services Portfolio Administration / Valuation Benefit Plan Recordkeeping & Services Structured Products Special Purpose Vehicles

23 Key U.S. Regulations Anti-Money Laundering Know Your Customer SEC Rule 15c3-1 (Net Capital) SEC Rule 15c3-3 (Customer Protection) Possession or Control Reserve Formula SEC Rule 17a-3 & 17 a-4 (Timely and Accurate Books & Records) SEC Rule 17a-13 (Quarterly Security Count) SEC 10b-10 & MSRB G-15 (Confirmation Disclosure) Regulation T (Credit Extension) NYSE 431

24 Operational Risks Key Concepts Financial Exposure Debits / Short Market Value Unsecured Deficits (Partly Secured) Aged Items Counterparty Events Regulatory Policies & Procedures Audit Trails Reputational Credits / Long Market Value Service Levels Timeliness / Accuracy Business Disruptions System Outages Natural Disasters Key Risks & Metrics Unauthorized Transactions Manual Processing Failed Data Feeds Trigger Events / Deadlines Reconciliation Breaks Uncollected Receivables Fails Data Accuracy Aged OTC Derivatives Confirms Missing Documentation Uncollected Margin Calls Technology Stability / Capacity Service Levels Vendor Management Fraud

25 Industry Trends More Volume More Products & Complexity More Technology Margin Compression Global Convergence Multi-Currency Multi-Lingual Sourcing / Off-shoring Regulatory Scrutiny Leverage of CCPs / Industry Utilities for OTC Derivatives Banking and Brokerage Convergence Bad News Travels Faster Than Ever

26 What Great Operations Teams Do Get the Basics Right Manage by Metrics Provide World-Class Service Facilitate / Drive Revenue Growth Competitively Reduce Expenses Proactively Manage Risks Be the Employer of Choice for Great Talent Manage Operations like a Business Build Strong Business Relationships as an Equal Partner Balance Speed and Control Balance Strategy and Tactics Leverage Global Capabilities Always Raise the Bar. Continuously Improve Challenge the Status Quo

27 Questions?

28 Fundamentals of Securities Operations Mark Alexander CIO and Head of Global Wealth and Investment Management Technology & Operations Bank of America Merrill Lynch March 9, 2011