Trade Inception

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The inception events of a trade can be classified into two categories. The pre-trade activities are those that have to take place even before the first trade is booked. The per-trade inception activities are the ones specific to each trade.

Pre-trade activities

The pre-trade activities are related to new product on-boarding and approval. As we saw, in-house trading platforms are designed to be nimble and responsive. In principle, it should take little time for a new product to be on-boarded. The last system I worked on, por exemplo, was designed to deploy a new product idea in a matter of minutes. But the architects of such systems tend to forget the human, process-related and control elements involved in it. As the slide above illustrates, a new product idea or a new pricing model originates from the work of a model quant or a structurer in Front Office. But before it gets anywhere near a production system, the pricing model needs to be validated, typically by the analytics team in the Middle Office risk management group. Once validated, the product goes through a tortuous approval process that may take weeks or months, and then a formal deployment process, which may again take weeks or months. When that process is completed, the product is available for trading in the trading platform.

Once available, the product can be instantiated as a trade. Each trade instance goes through its own validation and approval process. The trade request may originate from the sales or structuring team in Front Office. They will also prepare the term sheet and other legal documents. Once these tasks are completed, a trade is booked into the trading platform.

Per-trade process

These inception events are depicted in the second slide above. One of the crucial steps in the approval process is the credit control. As we described earlier, o credit risk management team uses a variety of tools to assess the risks involved. With their approval, and with the traders understanding of the market price of the product, a product available in the trading platform becomes a trade in the database. And the lifecycling fun begins.