10 Dec3 Cardinal Sins in Processing Inter-Company Trades

There are three great career wreckers in the Financial Services industry: interest claims, inter-company trades and FX hedging. Inter-company trades, trades between two different legal entities within a group, are the topic for this week’s thoughts.

I picked the term “career wreckers” with good reason. There are no happy endings in inter-company trade stories. Well that is my view, simply because when it goes wrong, there is simply nobody outside your firm you can blame. If any readers have an inter-company trade story with a happy ending, please, please share.

Banks are complex ecosystems; partly driven by regulatory fiat, which might require that certain activities are in certain entities and partly by their own propensity for complexity. So there are lots of entities and that, more often than not, means there are a lot of trades between two entities.

  • I am reliably informed that in the heyday of Bankers Trust, ⅔ of all trades were internal
  • From days supporting a major investment bank I know that some 40% of payment volume and value was inter-company
  • One major IB found that 80% of its non-domestic payments volume was inter-company. 80% of 250 billion dollars per day.

So, these trades are important both because there are a lot of them and if they go wrong, there is nobody else to blame. Old banking hands will not be surprised if I opine that the quality of inter-company processing is more often than not, not at all good. Actually, old banking hands will not be surprised if I opine! Whilst I could wax lyrical at length on this topic and have done so in the Bankers’Plumber’s Handbook, a few points will suffice in this forum.

Sin #1: Independent Booking. If the two entities involved book separately to each of their trading systems, this is the proverbial thin end of the wedge. That means the trade has to be subjected to the same confirmation matching as every other trade and that work gets done twice. My recommended best practice would be to stick to a “hub & spoke” model and restrict the spokes to only trading with the hub and not with each other. On top of this, book from one place; the hub. Generate bookings to the spoke system electronically.

#2: Single Point of Reconciliation. Firstly, if the trades are booked from the one electronic input, then you do not need to do any confirmation matching, but you ought to do some form of open item comparison. My recommended best practice would be that if the hub thinks it has 100 open trades with Spoke Entity A, across all future value dates, then you should do an “open item reconciliation” to ensure that Spoke entity A’s record show the same 100 open trades, equal and opposite of course. Do this once and do it centrally; in the hub.

#3: Gross Settlement, Different Banks or Custodians. Quite often, different entities use different banks, mostly as a result of inadequate planning rather than conscious Network Management. And more often than it should happen, trades, be they securities or FX, are settled between the Nostros or Depots in the real world. This adds real cost, uses up credit lines and creates some risk. No one best practice recommendation fits all, because capabilities vary. My favourite solution is the “Bank for the Group”, i.e process all of the ash and depot movements that are inter-company through some central processing. If this cannot be done, then next best is to have all operating entities have Nostro or Depots with the same provider. Negotiate group terms and then ensure that all inter-company trades settle via that route.

Lessons to be Learned:  Inter-company trades are likely a necessary evil, but they need operational focus. Optimise those processes, around rigorous central control. Chances are that whatever you think the effort is that is expended on matters inter-company, you are out by 100%.

And don’t forget, if you have an inter-company story with a happy ending, please share it.

Previous Posts: Are available on the 3C Advisory website, click here.

Publications: 

The Bankers’ Plumber’s Handbook

How to do Operations in an Investment Bank, or Not! Includes all the Blog Posts, with the benefit of context and detailed explanations of the issues. True stories about where things go wrong in the world of banking. Available in hard copy only.

Cash & Liquidity Management

An up to date view of the latest issues and how BCBS guidance that comes into force from Jan 1 2015 will affect this area of banking. Kindle and hard copy.

Hard Copy via Create Space: Click here

Amazon UK: Click here

Amazon US: Click Here

Thanks for your support and thanks to the numerous contributors.

Leave a Reply

Your email address will not be published.

CAPTCHA, to Submit please solve this: * Time limit is exhausted. Please reload CAPTCHA.