Introduction
A high proportion of information technology graduates find themselves working for investment firms such as investment banks, fund managers, custodians and wealth managers. In their new jobs they very often feel overwhelmed by the complexity of what it is that their new employers are trying to do; the jargon that is used and the complexity of the application configurations that are involved in processing the transactions.
This book is aimed at information technologists who are employed in the investment industry in roles such as developers, business analysts and quality assurance analysts.
The book fulfils two functions. Part One provides the reader with an understanding of the financial instruments and transactions that their employer is concerned with. It introduces the concept of straight-through-processing (STP), explains the lifecycle of the common transactions in the relevant instruments and also deals with the events and actions that are the consequences of holding positions in the instruments concerned. It does not deal in detail with the valuation and analytical tools that are required to value and price complex instruments and transactions, as these topics are well covered by a number of other publications.
The instruments and transaction types that are included in the book’s scope are equities, debt instruments (including fixed rate bonds and floating rate notes), currencies (including money market loans and deposits and foreign exchange), listed futures and options, OTC derivatives such as swaps and hybrid transactions (including stock lending and repo transactions).
Because many financial institutions – including those with little or no historical connection with Islamic countries – now trade Sharia compliant products such as Sukuks, the book also provides an introduction to these instruments.
This book also explains how investment firms are regulated and the impact of financial regulation on the business applications that are used to process transactions and manage positions; as well as outlining the financial accounting requirements of investment firms.
As each of the above topics is explained, the book goes on to examine the necessary content of the business applications. It explains what static data these applications need to hold and why; what messages they need to send and receive and why; and what accounting entries they need to pass for both cash and stock for each of the instruments within the book’s scope.
There are many different kinds of “players” in the financial markets, including investment banks, institutional fund managers, private client fund managers and stockbrokers, money brokers, custodians and investment exchanges to name but a few. The IT infrastructures of each type of market player are different. This book is written from the perspective of a bank or broker that processes trades in and holds positions in all the instruments and transaction types that are within the book’s scope.
Chapter by Chapter, Part One is structured as follows.
Chapters 1 to 5 introduce the reader to five classes of financial instrument that are used as investments – equities, debt instruments, cash, listed derivatives and OTC derivatives. It explains the basic characteristics of each instrument, and introduces the reader to the basic calculations involved in trades in these instruments. Chapter 6 then summarises the common elements of all these different instruments.
Chapter 7 describes the roles of the various types of companies that operate in the investment industry, including investment banks, fund managers, hedge funds, investment exchanges, clearing houses, custodians, central securities depositaries and private client stockbrokers, and examines how these firms interact with each other when the various financial instruments are bought or sold, or borrowed and lent.
Chapter 8 describes how investment firms are regulated, with particular emphasis on the UK and the European Economic Area.
Chapter 9 introduces the reader to the concept of straight-through-processing, and Chapter 10 examines the importance of accurate static data to achieve this goal.
Chapter 11 examines how messages are exchanged between the different types of market practitioners in the process of placing orders, executing them, agreeing that the resulting trades are correct and then settling the trades. This chapter covers all the instruments described in Chapters 1 to 6. It also describes the role of SWIFT and the FIX Protocol in standardising and carrying messages between different companies that are active in investment.
Chapter 12 describes the processes of trade agreement and the contents of settlement instruction messages for all the instruments that were covered in Chapters 1 to 5; and Chapter 13 examines the consequences of failed or late settlement of transactions.
Chapter 14 examines the concepts involved in investment accounting and book-keeping, both for cash amounts and the business content requirements of the general ledger applications; while Chapter 15 examines the function and business content of the stock record application, which fulfils the same function for security quantity book-keeping.
Chapters 16 to 20 provide example STP flows from the order being placed through to the trade being executed, confirmed and settled for each of the instruments that were described in Chapters 1 to 5.
Chapter 21 examines securities lending and borrowing and repo transactions and the business content requirements of applications that are used to process these transactions.
Chapter 22 examines the impact of the growing market for financial instruments that meet the requirements of Sharia law, and how these Sharia compliant instruments and transactions differ from the standard instruments and transactions that were described in earlier chapters.
Chapter 23 examines the activities involved in and the business application content requirements for the management of an investment portfolio, including dividend, coupon and corporate actions processing, marking to market, accrual of interest and reconciliation.
Chapter 24 outlines how risk is measured and managed in an investment firm and the business applications that are involved in the process.
Part Two of the book looks at the role of the information technology department of the investment firm. The activities covered in Part Two are common to all types of organisations, not just investment industry firms.
Chapter 25 examines how the IT department manages day-to-day activities such as application support, helpdesk management, data retention requirements, change control procedures and business continuity planning.
Chapter 26 examines how the department manages change. It looks at software development lifecycles, project management standards, requirement gathering techniques and application testing strategies and techniques.
Chapter 27 examines the processes of software vendor and package selection, and outsourcing and offshoring of activities.
HOW TO USE THIS BOOK
I have attempted to gradually build up the reader’s knowledge of instruments, transactions and events within transactions as the book progresses. As a consequence, the later chapters of Part One often make reference to points covered in earlier chapters, and there are also forward references within the earlier chapters. I therefore recommend reading the book chapter by chapter, rather than reading individual chapters in isolation.
Words and terms that are included in the Glossary of Terms are highlighted in bold the first time that they appear in the text.
I have made every effort to avoid errors in the text, but any that remain are my responsibility and I apologise for them. I would welcome opportunities to correct errors in any future editions, and would appreciate being informed of them by email to [email protected].