They are involved in the below functions:
Trade Validation & Settlement
Trade capture When a deal is made the details must be properly recorded. Nowadays this is often done by the trader or an assistant entering the details into a computer system. From there the information flows through to the bank’s operations or ‘back-office’ systems. Operations staff are responsible for ensuring that correct data (including settlement instructions) are captured and that anomalies are corrected.
Confirmation exchange with the Counterparties
Confirmation The confirmation of a trade is legal evidence that it has been agreed.
Reconciliations
A Nostro account is a bank’s account with another bank. Nostro reconciliation is designed to ensure both that a trade has settled properly and that the correct payments have been made as expected. It involves checking that the expected cash movements resulting from trades are reflected in the actual movements of cash in the Nostro bank. Nowadays the process is highly automated.
Position valuation
Valuation involves establishing the correct current value of trades and of trading books. The key principle here is that valuation should be verified by staff who are separate from the sales and trading function, to ensure an independent check. If there is an active and liquid market for an asset then the market value can be used for position valuation. This is the case with standardized products such as exchange-traded contracts. In less liquid markets or with more exotic or structured derivatives, position valuation can be checked against data obtained from independent sources such as brokers or other banks. The pricing models used by traders dealing in more exotic products may also be independently evaluated.
Collateral and funding management
Collateral management is the process of ensuring that margins are paid and collected. A failure to collect adequate collateral from clients will increase the risk that a derivatives operation will suffer from counterparty default. Funding management includes arrangements for ensuring that adequate and timely funds are available in the correct currencies to settle all trades.
Management information systems (MIS)
Proper systems have to be put in place to generate relevant management reports and warnings about problem areas in the business. Mistakes in this area will result in failures to take corrective measures, leading to losses and potential disputes with the regulatory bodies.
BEST PRACTICE IN OPERATIONAL RISK MANAGEMENT
The industry works hard at developing ‘best practice’ in these areas. It trains and develops its staff, and spends huge sums of money on new information and communications technology designed to automate operational procedures. Nevertheless, it is very hard to eradicate all the operational risks in a business. In particular, from time to time a ‘rogue trader’ seems to find a way through whatever controls are in place. One of the major areas for improvement for the future of the derivatives industry is the recruitment, training, management and indeed the status of the internal support staff working in banks. The derivatives industry needs risk control and operations people who are able to exert real control over the activities of traders and other front-office staff who occupy powerful (and very highly paid) positions within their organizations.
Segregation of duties .
There are a number of ‘best practice’ rules that reinforce this separation:
• There should be separate reporting lines for the trading and for the settlement functions.
• Traders should never have the sole authorization to make a payment on a trade.
• Traders should never have sole responsibility for the revaluation of open trades, and should not be the unique source of data used for revaluation and profit and loss calculations.
• Traders should never have sole responsibility for developing pricing models.
• No one single individual should enter data for a trade, authorize a payment and reconcile the movements of cash and securities.
To back this up, banks impose strict controls on the use of computer passwords, to safeguard access to information and systems. They require staff to take holidays consisting of at least 10 consecutive business days. This helps to ensure that all activities are seen and monitored by other people in the organization. The key principle is that no one individual should be the only person solely responsible for all aspects of a transaction.
Various SWIFT types used by Operations team can be found in the below link:
https://www.iotafinance.com/en/SWIFT-ISO15022-Message-types-in-category-1.html
