Financial Markets Operations Management (eBook)

Keith Dickinson (Autor)

eBook Download: EPUB

2015
John Wiley & Sons (Verlag)
978-1-118-84390-1 (ISBN)

Infos

A comprehensive text on financial market operations management

Financial Market Operations Management offers anyone involved with administering, maintaining, and improving the IT systems within financial institutions a comprehensive text that covers all the essential information for managing operations. Written by Keith Dickinson—an expert on the topic—the book is comprehensive, practical, and covers the five essential areas of operations and management including participation and infrastructure, trade life cycle, asset servicing, technology, and the regulatory environment. This comprehensive guide also covers the limitations and boundaries of operational systems and focuses on their interaction with external parties including clients, counterparties, exchanges, and more.

This essential resource reviews the key aspects of operations management in detail, including an examination of the entire trade life cycle, new issue distribution of bonds and equities, securities financing, as well as corporate actions, accounting, and reconciliations. The author highlights specific operational processes and challenges and includes vital formulae, spreadsheet applications, and exhibits.

• Offers a comprehensive resource for operational staff in financial services
• Covers the key aspects of operations management
• Highlights operational processes and challenges
• Includes an instructors manual, a test bank, and a solution manual

This vital resource contains the information, processes, and illustrative examples needed for a clear understanding of financial market operations.

Autor

KEITH DICKINSON is Director of The Settlement & Management Research Consultancy Limited, Principal of Financial Markets Training Limited and a Senior Teaching Fellow at the International Business School Suzhou at Xi'an Jiaotong-Liverpool University, Suzhou. His career has spanned twenty years as an industry practitioner in operations and over twenty years in executive education and academia.

Textauszug

CHAPTER 1
Introduction to Operations

1.1 INTRODUCTION

For every action there is a reaction. For every transaction, there has to be an appropriate sequence of processes such as a payment, a delivery of an asset, an exchange of information or a combination of these. We refer to this as an operational process. In this introductory chapter, we will see how an investment company's Operations Department relates to other departments within the company and other external organisations.

Firstly, we need to distinguish the operations of an organisational entity and the entity's post-transactional operations.

What do the following types of business actually do?

• Vineyard?
• Publisher?
• Hotel?
• Insurance company?

In simple terms, these businesses produce something (often referred to as outputs):

• Vineyards produce wine;
• Publishers produce books, newspapers and computer software;
• Hotels produce satisfied customers;
• Insurance companies help customers reduce their financial risks.

These outputs are the results of the transformation of a variety of inputs, including some of the following (the list is not exhaustive):

• Vineyard – grapes, yeast, water, sugar, etc.
• Publisher – authors, ideas, paper, digital resources, etc.
• Hotel – premises (rooms, dining areas), food, staff (front of house, catering, cleaning), ambiance, etc.
• Insurance company – products, sales staff, research & development staff, distribution channels, etc.

This is what businesses “do”; we know this as the business operations and the transformation of inputs into outputs are how each business operates.

Q&A

Question

An investment company is also a business operation. What do you think are the inputs and outputs? How might an investment company be profitable?

Answers

Table 1.1 gives the answers.

TABLE 1.1 Inputs and outputs of an investment company

Inputs

Managing portfolios for clients (asset management) Trading for the company's own account (proprietary trading in securities, cash, foreign exchange, derivatives) Advising issuer clients re capital raising (equity or debt) Advising corporate clients re mergers and acquisitions either as target or bidder (takeovers) Designing new products (innovation) Employing strategies to protect assets (hedging)

Outputs

Increased profitability Increased wealth for clients Portfolios protected from market risk Successful new issuance of securities on behalf of issuer clients Innovative solutions to investment challenges and changes in regulation

Sources of Revenue

Interest from loans to counterparties and clients Trading profits (bid/offer spread) Charging fees to clients Income from deposits, dividends (equities) and coupons (bonds) Commissions levied on new issues, etc.

What is missing here is the processing that occurs after the inputs have taken place. A trader executes a transaction; the decision-making that led to the requirement to transact, the negotiation with a counterparty and the final execution of the transaction are all part of the business operation. What happens next is the completion of that deal. By completion, we mean the settlement, the exchange of the financial instrument for cash. This processing, this completion, is what financial market operations is all about. It is what we in the Operations Department do.

There is, therefore, a distinction between the operations of a business and Operations in the sense of processing most of the inputs. In this opening chapter you will learn:

• How an investment company is typically structured;
• What the departments' roles are;
• What relationships Operations have with internal departments and external entities;
• Other service functions within the business.

1.2 ORGANISATIONAL STRUCTURE OF AN INVESTMENT COMPANY

There is no right or wrong way to organise the structure of an investment company. It depends on the size of the company, the products in which it deals and the locations of its offices.

The biggest companies, for example the investment banks, will have several thousand staff located in offices based around the world. By contrast, the smallest, such as a hedge fund, might have less than 100 staff working from one office.

What is usually certain is that there will be one department that generates business for the company and one that ensures that the business is administered in an efficient, controlled, timely and risk-free manner. In many companies there will be a third department that supports these two.

We refer to these three departments or offices as follows:

• Front Office – the business generator;
• Middle Office – the administrator;
• Back Office1 – the supporter.

1.2.1 Front Office

The Front Office generates revenue and is responsible for the buying and selling of financial products.

Within the Front Office (see Figure 1.1) there are generally five areas:

1. Corporate Finance – This area helps clients to raise funds in the capital markets and advises clients on mergers and acquisitions. Corporate finance can be divided into industry coverage (e.g. financial institutions, industrials, healthcare, etc.) and product coverage (e.g. leveraged finance, equity, public finance, etc.).
2. Sales – The sales desk will suggest trading ideas to clients (institutional and high- net-worth individuals) and take orders. Orders must be executed at the best possible price and this can mean placing an order internally or with an external trading desk.
3. Trading – The trading desk (aka the dealing desk) executes trades on behalf of the investment organisation (known as principal, proprietary or own-account trading). The traders can take both long and short positions in financial instruments that they have been authorised to trade in. This desk also executes trades on behalf of the sales desk, as noted above.
4. Repo Desk – The repo desk supports the traders by helping to finance their positions. When the traders go long, they need to borrow cash. The repo traders borrow cash through repo. Conversely, when the traders go short, they need to borrow securities. The repo traders borrow securities through reverse repo.
5. Research – Research is undertaken for a variety of reasons. For example, equity research review companies write reports about their prospects and make “buy”, “sell” or “hold” recommendations. Predominantly, research is a key service in terms of advice and strategy; it covers credit research and fixed-income research amongst others.

FIGURE 1.1 Investment organisation – structure

There are other, similar types of Front Office used by organisations, such as:

• Stockbrokers – These act in an agency capacity on behalf of clients. They can offer “execution only” (without any advice) brokerage, non-discretionary services (provide advice but can only trade subject to a client's instructions) and fully discretionary services (the broker decides what to do based on the client's overall investment objectives without seeking case-by-case instructions).
• Market makers – These make their money by using their company's capital to quote bid and offer (buy and sell) prices in pre-specified securities. Market makers are obliged to make a two-way price in any and all market conditions.
• Investment managers – These use their clients' cash to make investment decisions in accordance with the clients' investment objectives. Having made the investment decisions, orders are placed with their brokers for execution in the market.
• Broker/Dealers – These can act as both a dealer (trading for the organisation's own account) and as a broker (on behalf of clients).
• Inter-dealer brokers – These are specialised intermediaries that execute transactions on behalf of sell-side institutions such as broker/dealers and market makers. The IDBs provide anonymity so that the market is not aware of the sell-side institution's positions.

In whatever capacity it is acting, the Front Office executes transactions either on a stock exchange or in the over-the-counter (OTC) markets.

1.2.2 Middle Office

Not every investment company is obliged to have a Middle Office, but the larger the company, the more likely it is to have one. The Middle Office is the link between the Front Office and the various operational departments (see Figure 1.2).

FIGURE 1.2 Investment organisation – structure

It both supports and controls output from the Front Office; it ensures that any trade is correctly booked and the economic consequences of the trade comply with various pre-agreed limits, for example:

• The...

Produkt-Details

• Erscheint lt. Verlag: 20.1.2015
• Reihe/Serie: The Wiley Finance Series
• Reihe/Serie: Wiley Finance Series
• Reihe/Serie: Wiley Finance Series
• Sprache: englisch
• Themenwelt: Recht / Steuern ► Wirtschaftsrecht
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• Schlagworte: accounting and reconciliations • asset servicing • boundaries of operational systems • distribution of bonds and equities • Finance & Investments • financial instrument operations • Financial Market Operations • financial markets IT • financial operations IT • Finanzmarkt • Finanz- u. Anlagewesen • Finanzwesen • Kapitalanlage • Keith Dickinson • limitations of financial market operations • participation and infrastructure • regulatory environment of financial market operations • securities financing • technology and financial market operations • trade life cycle
• ISBN-10: 1-118-84390-8 / 1118843908
• ISBN-13: 978-1-118-84390-1 / 9781118843901