Derivatives Trade Lifecycle

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Course Features

  • Course Code: 115
  • Certificate: Yes
  • CPE Credits: 7
  • Level: Beginner-intermediate
  • Prerequisites: Knowledge of Der
  • Method: Live & Virtual
  • Venue: MicroTek
  • Time: 9:00 am – 5:00 pm
  • Registration: 8:30 am
  • Dress Code: Business Casual
  • Category:
  • Course Duration: 1 Day
  • Available Course date: 09/09/2019

Derivatives Trade Lifecycle

The financial press usually concentrates on how financial derivatives are utilized to hedge or speculate or on how the misuse of financial derivatives has caused significant financial losses at financial institutions, municipalities, and corporations. Yet, key legal and operational risks in the global use of financial derivatives remain a mystery, even to many practitioners in this rapidly growing global industry. Transacting derivatives is detailed and document intensive. The very architecture of derivatives’ front, middle, and back office functions can present numerous challenges to both on-site and off-site bank examiners, auditors, and compliance professionals. These professionals require specialized and routinely upgraded supervisory skills to meet their demanding objectives.

 

Who should attend

This interactive course is tailored for bank examiners and supervisors, auditors, and compliance professionals who need to understand the operational and legal risks of major foreign exchange, interest rate, equity, and credit derivatives. The course will consist of an interactive lecture and in-depth exercises. Additionally, relevant articles highlighting recent regulatory, examination, and risk trends in financial derivatives will supplement this course.

 

At the end of the course, participants will be able to:

 

Module I: Trading Operations

  • Describe organizational structure and best practices expected at a front office (identify transaction flow and reporting)
  • Describe organizational structure and best practices expected at a middle office
  • Identify key areas of a back office and expected best practices for operations:
    • Internal controls
    • Ticket flow
    • Trade transactions: confirmations; clearance (netting and its uses; discuss role of clearance facilities; DTCC)
    • Evaluate requirements for margin
    • Settlements (discuss risks during settlement process)
    • Foreign payments
    • Reconciliations
    • Discrepancies and disputed transactions
    • Revaluation
    • Documentation and record keeping

 

Module II: Overview of Key Financial Derivatives

  • Review mechanics of key derivatives and how they are used to hedge or speculate (foreign exchange, interest rate, and credit)
  • Debate influence of Basel III’s implementation and financial regulatory reform on the treatment of financial derivatives

Exercise: Take a derivative and identify its potential financial risks

 

Module III: “ISDA®[1]

  • Identify key components of the 2002 “ISDA®” architecture
    • Specifications
    • Schedules
    • Confirmation
    • Netting
    • Collateral / Credit Support
    • Opinions
    • Users’ Guides
    • Protocols (2005 Novation Protocols)
    • Annexes: their purpose and how they are interrelated
  • Highlight differences with the 1992 “ISDA®”
  • Discuss credit and operational issues with derivatives’ documentation
  • Evaluate importance of derivatives documents in the event of a bank failure and resolution

Cases: Lehman, Metavante, and Swedbank.

 

Module IV: Financial Risks and Risk Management

  • Define risk
  • Review risks that can arise from financial products: credit; market; liquidity; strategic
  • Evaluate evolving definition of legal risk: documentation; compliance
  • Evaluate evolving definition of operational risk: people; processes; technology; external influences
  • Compare and contrast best practices to effective risk management steps
  • Identify influence of Basel II on operational risk (Possible influence on legal and liquidity risks?)

Case Study: Société Générale

 

Exercise I: participants will break up into groups to discuss and apply key components of a risk based bank examination of a trading function using foreign exchange derivatives and interest rate swaps. Emphasis will be on best practices that examiners and auditors are looking for throughout the front, middle, and back offices of a financial institution. {Reading before the exercise: Examination Procedures and Internal Control Questionnaire, Trading and Capital Markets Activities Manual}

 

Exercise II: participants will break up into different groups from the previous exercise. They will walk through a single name credit default swap from the point after a deal is agreed upon through final maturity of the swap. Scenarios exploring possible risks during the instruments’ lifetime will be explored.

[1] ISDA® is a registered trademark of the International Swaps and Derivatives Association Master Agreement and its application to financial derivatives.

Instructor

  • Mayra Rodríguez Valladares is Managing Principal of MRV Associates.  She specializes in training and consulting solutions for Basel III, Dodd-Frank, risk management, financial derivatives, capital markets, foreign exchange, and corporate finance.  She has worked with private sector and foreign central banks in the US, UK, Latin America Eastern Europe, Central and Southeast Asia, and Africa, …
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