Many students may know the fundamentals of the lifecycle of a trade but they wont know what is actually

involved. I
personally did not know the importance of each stage until starting my internship at J.P. Morgan in the summer of
2012. I am going to break down the trade life cycle into six steps as opposed to the original front office, middle office
and back office. This is because often these departments are often interlinked and work closely with each other. The
six processes are:

Trade Execution

Trade Capture/Support

Profit and Loss

Confirmation

Settlement

Accounting
There has always been the misconception that computer systems very quickly process the whole trade without
manual intervention. Although technology has vastly improved, immediate processing is only implemented in certain
stages of the trade with many processes still conducted manually.
Trade Execution
Trade execution begins with a Sales Trader who discusses with their clients their requirements on issues such as
how much they are looking to hedge or speculate. The Sales check that the client is on boarded which means that
the client has been approved by the credit officer for their collateral agreement or International Swaps and Derivatives
Association (ISDA) agreement for derivative trades. The ISDA is a contract where it outlines the rules which the two
parties will trade and only applies for derivative trades since they are more complex than other trades such as
FOREX. The Sales Trader obtains a price from the Trader which is quoted to the client. Should the client accept, the
trade is complete. The Trader can buy or sell the financial product via telephone, electronic exchange or trading floor.
It is mandatory for the traders to run a book that shows their long-term and short-term positions in order to reduce
risk.
Trade Capture/Support
The next process is trade capture/support. As part of market regulations, all trades must be recorded officially and
entered into risk management systems. The trade is then checked and validated by checking the static data. There
are many controls to update the necessary information. For example, verifying whether the counterparty account is
recognised.
One problem that may occur is if trades are executed late which may affect the lifecycle of the trade as settlement
may not be made on a timely basis. Moreover, late trades must be alerted for Profit & Loss (P&L) and risk-reporting.
In P&L, it is responsible for validating all daily losses and gains. For example, Front Office calculates a flash which is
an estimate of how much is made or loss that day and is compared with the previous days actual reconciled P&L
This data is then collected and reviewed at the end of the month. Once all changes are made and documented, it is
finalised by the trader that officially closes the book for that month.
Trade Confirmation
Trade confirmation is technically a contract; it ensures that the trade is captured into risk management systems to
reduce risk of the traders P&L. It sets out the details of the trade between the counterparty and can be done through
a contract or through auto-match, such as a swift or manually matched against the system and outgoing confirmation.
This can be done through external companies or systems such as The Depository Trust & Clearing Corporation.

Settlement
Settlement is split into three areas; pre-settlement, settlement and post-settlement. Settlement is the movement of
securities and cash between concerned parties. Settlement date is the day this exchange has to be agreed and
delivered by.
The role of pre-settlement is to ensure the trade settles by obtaining the correct settle instructions and that the
confirmation has matched the funding of Nostro cash accounts, our correspondent bank accounts. For cash
settlements; these transactions need to be settled before the currency cut off so swift messages need to be sent to
the correspondent bank prior to settlement day. After settlement, post-settlements are responsible for investigating
ledger and statement cash entries that do not match. They do this through systems such as TLM which searches for
Statement credits to match Ledger debits.
Accounting
Finally the role of accounting within the bank is responsible for looking after all the transactions taken place. This can
be done through double entry bookkeeping which shows that the total of debits and credits must equal, otherwise
something is recorded inaccurately. They are also responsible for looking after the general ledger which shows the
record of all the financial transactions of the company.