After the Trade Is Made, Revised Ed.

After the Trade Is Made, Revised Ed.

Processing Securities Transactions

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  • ePub
  • ISBN 9781440623790
  • 544 Pages
  • Portfolio
  • Adult

Overview

The fully updated classic guide to the mechanics of securities processing—a must for professional investors 

This third edition of After the Trade Is Made reflects the changes that have taken place in recent years as a result of new products, technological breakthroughs, and the globalization of the securities industry. Comprehensive and easy to understand, it provides brokers, operations personnel, and individual investors with definitive and up-to-the-minute explanations of each step in the trading process—from the moment a customer decides to buy or sell a security through the final requirements of record keeping.

Written for both securities professionals and individual investors, whether domestic or in other countries, this new edition clearly explains the core of underwritings, new and established trading markets, transaction processing, margin, and more—while providing critical insights into the most recent wave of industry changes.

David M. Weiss, a veteran securities professional, traces the entire process of buying or selling a security, from order management to transaction processing to the final posting on the firm’s books and records. He covers the specialized attributes of each function in a typical brokerage firm, as well as their relationships with commercial banks, transfer agents, clearing corporations, and depositories.

After the Trade Is Made is the definitive resource for anyone eager to understand and confidently navigate the vast and often surprising world of securities.

Table of Contents

Preface

Chapter I. Overview of the Industry

I-A. Broker/Dealers

I-A-1. What Are Broker/Dealers?
I-A-2. What Are the Types of Broker/Dealers?
I-A-3. What Are the Component Parts of a Typical Broker/Dealer?
I-A-3-a. Front Office
I-A-3-b. Middle Office
I-A-3-c. Back Office
I-A-3-d. Other Key Components

I-B. The Markets

I-B-1. What Are Markets?
I-B-2. What Is a “Two-Sided” Market?
I-B-3. The Different Marketplaces

I-C. Industry Regulators

I-C-1. Who Are the Regulators?
I-C-1-a. Securities and Exchange Commission
I-C-1-b. State Regulators
I-C-1-c. Self-Regulatory Organizations (SROs)
I-C-1-d. The Commodities Futures Trading Commission
I-C-1-e. Other Regulators

I-D. Required Examinations

I-E. Regulatory Reporting

I-E-1. Net Capital
I-E-2. Customer Protection
I-E-3. FOCUS

I-F. Who Are Our Clients?

I-F-1. Clients Who Provide Product
I-F-2. Types of Clients
I-F-3. Main Categories of Clients
I-F-4. Types of Accounts

I-G. What Are The Industry Organizations?

I-G-1. Depositories
I-G-2. Clearing Corporations
I-G-3. Industry Utilities
I-G-4. Banks
I-G-5. The Bond Market Association (TBMA)
I-G-6. Security Industry Association (SIA)

Chapter II. Products That We Offer

II-A. Corporate Securities

II-A-1. Common Stock
II-A-1-a. Voting
II-A-1-b. Dividends
II-A-1-c. Underwriting
II-A-1-d. Trading of Common Stock
II-A-1-e. Common Stock as an Investment Vehicle

II-A-2. Preferred Stock
II-A-2-a. Dividends
II-A-2-b. Underwriting

II-A-2-b-i. Dividend Rate
II-A-2-b-ii. Cumulative and Noncumulative Dividends
II-A-2-b-iii. Callable
II-A-2-b-iv. Convertible
II-A-2-b-v. Participating
II-A-2-b-vi. Adjustable-Rate Preferred
II-A-2-b-vii. Reverse Floating Rate
II-A-2-b-viii. Putable Preferred
II-A-2-b-ix. Self-Liquidating Preferred
II-A-2-c. Summary of Preferred
II-A-3. Rights and Warrants
II-A-3-a. Rights
II-A-3-a-i. Cum Rights
II-A-3-b. Ex-Rights
II-A-3-c. Arbitrage
II-A-3-d. Warrants
II-A-3-e. The Certificate

II-A-4. Corporate Bonds and Notes
II-A-4-a. Payment of Interest
II-A-4-b. The Marketplace
II-A-4-c. Pricing of a Corporate Bond

II-A-4-c-i. Accrued Interest
II-A-4-d. Bond Ratings
II-A-4-e. Indenture
II-A-4-f. Retiring Bonds
II-A-4-g. Bond Security

II-A-4-g-i. Mortgage Bonds
II-A-4-g-ii. Collateral Trust Bonds
II-A-4-g-iii. Equipment Trust Bonds
II-A-4-g-iv. Debenture Bonds
II-A-4-h. Registration
II-A-4-i. Default
II-A-4-j. Other Bond Features

II-A-4-j-i. Callable Bonds
II-A-4-j-ii. Convertible Bonds
II-A-4-j-iii. Zero-Coupon and Floating-Rate Bonds
II-A-4-k. Bonds and Notes Summary
II-A-5. Commercial Paper
II-A-5-a. Issuance
II-A-5-b. Trading
II-A-5-c. Settlement
II-A-5-d. Handling the Certificates
II-A-5-e. Financing
II-A-5-f. Maturity

II-B. Municipal Securities

II-B-1. The Competitive Underwriting
II-B-2. Offering of Municipal Bonds
II-B-3. The Effect of Income Tax Rates
II-B-4. Municipal Bonds
II-B-4-a. Trading Municipal Bonds
II-B-4-b. Basis Pricing
II-B-4-c. Types of Municipal Bonds

II-B-5. Municipal Notes
II-B-6. Municipal Securities Summary

II-C. U.S. Treasury Instuments

II-C-1. The Fed Auction
II-C-2. U.S. Treasury Bonds and Notes
II-C-3. Treasury Strips
II-C-4. U.S. Treasury Bills
II-C-5. Settlement
II-C-6. U.S. Treasury Instruments Summary

II-D. Mortgage-Backed and Asset-Backed Securities

II-D-1. Role of Mortage Banker
II-D-2. TBAs/Forwards
II-D-3. Modified Passthroughs
II-D-4. Collateralized Mortgage Obligations (CMOs)
II-D-5. Interest Only/Principal Only
II-D-6. Puts, Calls, and Standbys
II-D-7. Asset-backed Securities (ABSs)

II-E. Bank-issued Securities

II-E-1. Bankers’ Acceptances (BAs)
II-E-1-a. Use in Importing
II-E-1-b. Trading

II-E-2. Certificates of Deposits (CDs)
II-E-2-a. Types of CDs
II-E-2-b. Trading
II-E-2-c. Interest

II-E-3. Asset-backed Securities and Private Label

II-F. Mutual Funds

II-F-1. Open- and Closed-End Funds
II-F-2. Net Asset Value versus Market Value
II-F-3. Load versus No-Load
II-F-3-a. Load Funds
II-F-3-b. No-Load Funds
II-F-3-c. ABC Funds
II-F-3-d. Quotes

II-F-4. Rule 12b-1
II-F-5. Bond Units
II-F-6. Money Market Funds
II-F-7. Mutual Funds Summary

II-G. Exchange-Traded Funds (ETFS)

II-G-1. Types of ETFs
II-G-2. How They Are Named
II-G-3. Characteristics of ETFs

II-H. Hedge Funds

II-H-1. Goals of Hedge Funds
II-H-2. Pricing Hedge Funds

II-I. Options

II-I-1. Listed versus OTC Options
II-I-2. American versus European Forms
II-I-3. Equity Options
II-I-4. Debt or Interest Rate Options
II-I-4-a. U.S. Treasury Bill Options
II-I-4-b. U.S. Treasury Note and Bond Options

II-I-5. Index Options
II-I-6. Foreign Currency Options
II-I-7. Settlement
II-I-8. Option Clearing Corporation (OCC)
II-I-9. Expiration

II-J. Futures and Forwards

II-J-1. Futures Contracts
II-J-1-a. Types of Futures Contracts
II-J-1-b. Settlement
II-J-1-c. Margin
II-J-1-d. Margin Requirements

II-J-1-d-i. Clearing Corporation Margin Requirements
II-J-1-d-ii. Brokerage Firm Margin Requirements
II-J-1-e. Types of Margin
II-J-1-f. Delivery
II-J-1-g. Daily Trading Limits

II-J-2. Forward Contracts

II-K. Swaps

II-K-1. Interest Rate Swaps
II-K-2. Currency Swaps
II-K-3. Commodity Swaps
II-K-4. Swaps Summary

II-L. Currency

II-L-1. What Is Foreign Exchange (FX)?
II-L-2. Users of the Market
II-L-3. Derivatives
II-L-4. Settlement

II-M. American Depositary Receipts (ADRs), American Depositary Shares (ADSs), and Global Depositary Receipts (GDRs)

II-M-1. American Depositary Receipts and Shares
II-M-2. Global Depositary Receipts

II-N. Restricted Stock

II-N-1. Rule 144 Stock
II-N-2. Rule 145 Stock
II-N-3. Rule 144A Stock

II-O. Summary of Investment Products

Chapter III. The Marketplaces and Order Management

III-A. The Market

III-A-1. Agency Transaction
III-A-2. Principal Transaction

III-B. Order Routing

III-B-1. Retail Order Entry
III-B-2. Institutional Order Entry
III-B-3. Order Requirements
III-B-4. The Quote
III-B-5. The Size
III-B-6. Time Constraints of Orders
III-B-6-a. Day Order
III-B-6-b. Good Through (GTC, GTM, GTW, and so on)

III-B-7. Type of Orders
III-B-7-a. Market Order
III-B-7-b. Limit Order
III-B-7-c. Short Sales
III-B-7-d. Stop Orders
III-B-7-e. Stop Limit Order
III-B-7-f. Fill or Kill (FOK) Order
III-B-7-g. Immediate or Cancel (IOC) Order
III-B-7-h. All or None (AON) Order
III-B-7-i. Not Held (NH) Order
III-B-7-j. At the Opening Orders
III-B-7-k. On the Close Orders
III-B-7-l. Spread Orders
III-B-7-m. Straddle Orders
III-B-7-n. Combination Orders
III-B-7-o. One-Cancels-the-Other (OCO) Order
III-B-7-p. Facilitation Order

III-B-8. Conclusion

III-C. The Exchanges

III-C-1. Types of Exchanges
III-C-2. The New York Stock Exchange
III-C-2-a. House Brokers
III-C-2-b. Independent Brokers
III-C-2-c. Specialists

III-C-2-c-i. Making Markets
III-C-2-c-ii. Executing Orders
III-C-2-d. The Crowds on the Floor
III-C-2-e. The Auction Market
III-C-2-f. Priority, Precedence, and Parity

III-C-2-f-i. Priority
III-C-2-f-ii. Precedence
III-C-2-f-iii Parity
III-C-2-g. The Specialist’s BookIII-C-3. The American Stock Exchange (AMEX)
III-C-4. Chicago Board Option Exchange
III-C-4-a. Opening Rotation
III-C-4-b. The Floor
III-C-4-c. Executing Orders

III-C-4-c-i. Time and Date Entered
III-C-4-c-ii. Buy or Sell
III-C-4-c-iii. Open or Close
III-C-4-c-iv. Quantity, Type, Class, and Series of Option
III-C-4-c-v. Customer, Firm, Market Maker/Specialist
III-C-4-c-vi. Firm Name or Designation

III-C-5. The International Security Exchange
III-C-6. The Future Exchanges

III-D. The Over-The-Counter (OTC) Market

III-D-1 NASDAQ
III-D-1-a. NASDAQ Systems
III-D-1-a-i. SOES
III-D-1-a-ii. ACES
III-D-1-a-iii. CAES

III-D-2. Other Over-the-Counter Equity Markets
III-D-2-a. Bulletin Board Securities
III-D-2-b. Electronic Commerce Networks (ECNs) and Alternate Trading Systems (ATSs)

III-D-3 The Debt Market
III-D-3-a. The Corporate Bond Market
III-D-3-b. The Municipal Bond Market
III-D-3-c. The Treasury Market
III-D-3-d. The Mortgage-Backed and Asset-Backed Securities Markets
III-D-3-e. Money Market Instruments

III-D-4. The Derivative Market
III-D-4-a. Options
III-D-4-b. Forwards

III-E. The Third Market

III-F. The Fourth Market

III-G. Odd Lots

Chapter IV. The Trade-Processing System

IV-A. Order Management System

IV-B. Client Account Control
IV-B-1. New Accounts/Name and Address
IV-B-1-a. New Account Form
IV-B-1-a-i. Terms and Conditions
IV-B-1-a-ii. Client Information
IV-B-1-a-iii. Standing Instructions
IV-B-1-a-iv. Type of Account
IV-B-1-a-v. Client’s Signature Block
IV-B-1-b. Types of Accounts
IV-B-2. Client Master Database Information Gathering
IV-B-2-a. Data Entry (NAOW)
IV-B-2-b. Automated Client Account Transfer System (ACATS)
IV-B-2-c. Account Opening Procedure
IV-B-2-d. Account Maintenance
IV-B-2-e. Institutional Accounts/SID/ALERT

IV-C. Security Properties Control
IV-C-1. Security Master Database
IV-C-2. Security Master Database Information Gathering

IV-D. Coding
IV-D-1. Unique Number

IV-E. Trade Figuration
IV-E-1. Agency versus Principal Transactions
IV-E-2. Regualtory Fee
IV-E-3. Equity Trade Figuration
IV-E-4. Bond Figuration
IV-E-5. Money Market Instruments

IV-F. Comparison
IV-F-1. Order Management System
IV-F-2. Equity Comparison
IV-F-3. Workings of the Clearing Corporation
IV-F-3-a. National Securities Clearing Corporation
IV-F-3-a-i. Principal Transactions
IV-F-3-a-ii. Market-Maker Trades
IV-F-3-a-iii. Agency Transactions
IV-F-3-a-iv. Principal Transactions (Modified)
IV-F-3-b. Equity Transaction Comparison
IV-F-3-b-i. What Is Being Compared?
IV-F-3-b-ii. Types of Comparison
IV-F-3-c. Regular Way Contract
IV-F-3-d. Trade Reporting and Compliance Engine (TRACE) Comparison

IV-F-4. Netting
IV-F-5. Continuous Net Settlement (CNS)

IV-G. Balancing of The Customer Side

IV-H. Fixed-Income Clearing Corporation
IV-H-1. Forwards and TBAs
IV-H-2. Mortgage-Backed Security Division of Fixed Income Clearing Corporation
IV-H-2-a. The Allocation
IV-H-3. Government Security Division of Fixed Income Clearing Corporation (GSD)

IV-I. Options
IV-I-1. OTC Options Comparison
IV-I-2. Listed Option Comparison
IV-I-2-a. ROTNs
IV-I-3. Posistion Reconcilement
IV-I-4. Option Exercise
IV-I-5. Ex by Ex

IV-J. Futures Comparison

IV-K. Trade Confirmation

Chapter V. Margin

V-A. Cash Versus Margin Purchases

V-B. Terminology

V-C. Cash Account

V-D. Margin Account

V-E. A Brief Lesson In Margin
V-E-1. Regulation T (“Reg T”)
V-E-2. Maintenance Rules
V-E-3. Loan Value
V-E-4. Margin Excess and Buying Power
V-E-5. Minimum Maintenance Requirement
V-E-6. Restricted Accounts
V-E-7. Special Memorandum Account (SMA)

V-F. Margin—Long Position
V-F-1. Reg T Excess
V-F-2. Buying Power
V-F-3. Minimum Maintenance Requirement
V-F-3-a. A Working Illustration

V-G. Margin—Short Sales
V-G-1. Required Margin
V-G-2. Mark to the Market
V-G-3. Maintenance Requirement

V-H. Maintenance Excess

V-I. Day Trading

V-J. The Margin/Credit Department as Part of Client Relationship Management
V-J-1. Account Maintenance
V-J-2. Sales Support
V-J-3. Clearance for Issuance of Checks

V-K. Margin Department’s Daily Routine
V-K-1. Reports to Produce
V-K-1-a. Exception Report
V-K-1-b. Items Due

V-K-2. Extensions
V-K-3. Close-Outs
V-K-4. Delivery of Securities
V-K-5. The Margin/Credit Workstation

V-L. Option Margin
V-L-1. Option Margin Theory
V-L-2. Margin Calculation for an Uncovered Equity Option
V-L-3. Margin for Spread Positions
V-L-4. Margin for Straddle or Combo Positions

V-M. Future Margin
V-M-1. Standard and Maintenance Margin
V-M-2. Mark to the Market
V-M-3. Variation Margin
V-M-4. Delivery and Payment
V-M-5. Standard Portfolio Analysis of Risk (SPAN) Margin

Chapter VI. Settlement

VI-A. Segregation (SEG)

VI-B. Receive and Deliver
VI-B-1. Preparation for Settlement
VI-B-2. Settlement Cycle Begins
VI-B-2-a. The Projection Report
VI-B-2-b. The Seg Report
VI-B-2-c. Seg Control
VI-B-2-d. Needs Analysis Report

VI-C. Fail To Receive/Fail To Deliver

VI-D. Financing Positions
VI-D-1. Bank Loan
VI-D-2. Stock Loan
VI-D-3. Stock Borrows
VI-D-4. Repos
VI-D-4-a. Government Security DIvision (GSD) of FICC GCF Repo Service
VI-D-4-b. Matched Book

VI-D-5. Letters of Credit
VI-D-6. Unsecured Loans

VI-E. Custodial Services
VI-E-1. Safekeeping
VI-E-2. Customer Seg
VI-E-3. Exemptions

VI-F. Settlements of Mortgage-Backed Securities
VI-F-1. GNMA Passthrough Securities
VI-F-2. Electronic Pool Notification (EPN)

VI-G. Settlement with GSCC and The FED

VI-H. Option Settlement
VI-H-1. Daily Activity Settlement
VI-H-2. OCC Margin
VI-H-3. Expiration

VI-I. Institutional Settlement
VI-I-1. Trade Suite, OASYS, Omgeo
VI-I-2. Alert and SID

VI-J. Mutual Fund Settlement
VI-J-1. Clearance
VI-J-1-a. Closed-End Fund Transacton Clearance
VI-J-1-b. Open-End Fund Transaction Clearance

VI-J-2. Acquiring Fund Shares
VI-J-2-a. FundServ
VI-J-2-b. Mutual Fund Profile Service (MFPS)
VI-J-2-c. ACATS/FundServ

VI-J-3. Defined Contribution

Chapter VII. Custodial Services

VII-A . Automated Customer Account Transfer Systems (ACATS)

VII-B. Transfers

VII-C. Standing Instructions

VII-D. Dividends and Bond Interest

VII-E. Corporate Actions (AKA Reorganizations)
VII-E-1. Mergers
VII-E-2. Acquisitions
VII-E-3. Tender Offers
VII-E-4. Stock Splits
VII-E-5. Reverse Stock Splits
VII-E-6. Spinoffs
VII-E-7. Processing Corporate Actions

Chapter VII. Role of the Banks

VIII-A. Custodian

VIII-B. Financing
VIII-B-1. Collateralized Loans and Hypothecation
VIII-B-2. Letters of Credit
VIII-B-3. Lines of Credit

VIII-C. Transfer Agent

VIII-D. Registrar

VIII-E. Paying Agent

VIII-F. Product Issuer
VIII-F-1. Commercial Paper
VIII-F-2. Certificates of Deposit
VIII-F-3. Bankers’ Acceptances
VIII-F-4. Asset-Backed and Mortgage-Backed Securities and Whole Loans

VIII-G. Foreign Exchange

VIII-H. Client

Chapter IX. Cash Accounting

IX-A. The Accounting Process

IX-B. Account Categories

IX-C. Debits and Credits

IX-D. Journal and Ledger
IX-D-1. Journal Entries
IX-D-2. Ledger Account
IX-D-3. Trial Balance
IX-D-4. Profit and Loss Statement and Balance Sheet

Chapter X. Brokerage Accounting

X-A. Cash Moves The Security

X-B. Location Accounts

X-C. Offset To Short Sales

X-D. Chart of Brokerage Accounts

Chapter XI. Stock Record

XI-A. Types of Stock Records
XI-A-1. Activity Stock Record
XI-A-2. Summary Stock Record
XI-A-3. Trade Date Stock Record

XI-B. Breaks and Illogical Positions

XI-C. Account Nomenclature

Chapter XII. General Ledger

XII-A. Daily Cash Report

XII-B. General Business

XII-C. Trial Balance

XII-D. Profit and Loss Statement

XII-E. Balance Sheet

XII-F. Statement of Cash Flow

Chapter XIII. Regulatory Reporting

XIII-A. Net Capital and Aggregate Indebtedness (Rule 15c3-1 of The 1934 Securities and Exchange Act)
XIII-A-1. The Broker/Dealer’s Capital
XIII-A-2. Computation of Net Capital

XIII-B. Customers Protection—Reserves and Custody of Securities (Rule 15c-3-3 of The 1934 Securities and Exchange Act)

XIII-C. Focus

Chapter XIV. Conclusion

Glossary
Index

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