ETDs (1): end-to-end lifecycle of Exchange-Traded Derivatives

Process
Pannell1 -
2:16 AM

1. Product Design and Listing

  • Design: Exchanges and market participants define contract specifications (e.g., underlying asset, expiry, lot size, tick size).
  • Regulatory Approval: Submitted to regulators for approval.
  • Listing: Once approved, the ETD is listed on an exchange (e.g., CME, Eurex).

 2. Pre-Trade

  • Market Data Access: Traders analyze market data, charts, and economic indicators.
  • Risk Management: Pre-trade checks are run, including credit limits and margin availability.
  • Strategy Setup: Traders define order types, strategies, and hedge plans.

 3. Trade Execution

  • Order Placement: Orders are submitted via electronic trading platforms or brokers.
  • Matching & Confirmation: Orders are matched by the exchange and confirmations sent back to counterparties.

 4. Trade Capture and Enrichment

  • Recording: Trades are captured in internal systems (front, middle, back office).
  • Enrichment: Additional details (e.g., legal entity, regulatory flags) are added for downstream processing.

 5. Clearing and Settlement

  • Clearing: Trades are novated by a Central Counterparty (CCP), which becomes the buyer to every seller and vice versa.
  • Margins: Initial and variation margins are calculated and exchanged daily.
  • Settlement: Though most ETDs are cash-settled, physical delivery is possible on expiry for some contracts.

 6. Post-Trade Processing

  • Reconciliations: Trade data is reconciled with clearing house and counterparty records.
  • Reporting: Regulatory and internal reporting (e.g., EMIR, CFTC, MiFID II).
  • Risk & PnL Management: Positions are marked-to-market and monitored.

 7. Lifecycle Events

  • Corporate Actions: Adjustments due to events (e.g., stock splits, dividends).
  • Rollovers: Positions moved from near to far expiry contracts.
  • Position Management: Intraday and end-of-day risk, PnL and exposure management.

 8. Expiry and Close-Out

  • Final Settlement: Cash or physical delivery depending on contract terms.
  • Exercise and Assignment: For options, depending on whether they’re exercised.
  • Trade Close-Out: Contracts expire or are closed by offsetting positions.

 9. Archival and Audit

  • Recordkeeping: All trade data stored for audit, compliance, and future reference.
  • Audit Trails: Maintained for regulatory review and internal control.
ETD

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