Trade life cycle in OTC markets

Trade life cycle in OTC markets



A trade goes through 3 main departments in an organization:

  • Front Office
  • Middle Office
  • Back office

Stages of the Trade life cycle in OTC markets:

Front Office

  1. Trade Initiation: The trader will try to find a seller either by directly contracting counterparties by phone, email, or through trading platforms.
  2. Trade Execution: The trader notes down the order details on the trade sheet/Trade blotter/Term sheet.
  3. Trade Capture: The details mentioned on the trade are captured in an order management system(OMS) or risk management system(RMS).


Middle Office

  1. Trade Enrichment: Additional required information for settlement of trade is added in this stage.
  2. Trade Verification: The trade sheet is compared with the details on the OMS or RMS system.
  3. Trade Validation: It is done to avoid operational risk and you should check the following points:

  • Trade Check: If all the economic and non-economic details of the trade are populated and correct. If we see if the trader who has booked the trade has the license to trade in the particular market we have to see if the trader has booked within his limits.
  • Counterparty Check: We see if the counterparty has the license to trade in that particular market(ISDA) International Swaps and Derivatives Association.


Back Office

  1. Trade Affirmation: We compare the details with the counterparty to ensure that there is no discrepancy in the details of the trade.
  2. Trade Confirmation: We draft the ISDA agreement and send it over electronically to the Counterparties to agree and send it back with their signed confirmation.
  3. Trade Settlement: Settlement Date (Cash VS Securities) or (Cash VS Cash) vice-versa is exchanged as per the agreement and type of derivate used.
  4. Trade Reconciliation: We check to see if the buyer has received the shares or cash and compare it with the agreed-upon instructions as per the agreement.

There could be many risks involved with OTC derivatives such as Trade Fail, and Counterparty Risk.


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