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Pre-trade Processing

Introduction​

Pre-trade processing is an important part of the trade lifecycle. It can involve a large number of steps, including initiation tasks like order routing, risk management assessment and compliance checking, as well as the actual trade negotiation, affirmation and confirmation.

Pre-trade in Securities Lending​

In securities lending a lender will broadcast their availability to lend specific securities to potential borrowers. This process allows borrowers to easily identify and select lenders who have the desired securities available for lending and can help facilitate trades more quickly and efficiently.

A borrower can also approach a lender directly in order to ascertain whether they have a security available to borrow. This request could be sent to one or more lenders, depending on the borrower's requirements.

Lenders regularly only share the bare minimum amount of detail when presenting their availability, often including only the security identifier. When responding to a request for a security from a borrower then the lender may provide a lot more detail, including interest rates and acceptable types of collateral.

Modelling the broadcast of available securities​

A lender will distribute anywhere from one to several thousand availability records to the market or individual borrowers. The model represents this using two types: AvailableInventory and AvailableInventoryRecord.

AvailableInventory

AvailableInventory is designed to hold a list of AvailableInventoryRecord items, with each item within AvailableInventoryRecord representing a specific piece of availability i.e. a security being held by a lender or custodian. Thus, for a lender to model a broadcast of say 10 different pieces of availability, the structure required would consist of one AvailableInventory with a list of 10 AvailableInventoryRecord items within it.

AvailableInventory​

As described above, AvailableInventory is used to hold the entire set of availability that the lender wants to distribute. This is where details that pertain to the overall availability and the records held within it should be specified. 

type AvailableInventory: 
    availableInventoryType AvailableInventoryTypeEnum (1..1) 
    messageInformation MessageInformation (0..1) 
    party Party (0..*) 
    partyRole PartyRole (0..*) 
    availableInventoryRecord AvailableInventoryRecord (0..*)

The attributes available are:

  • The availableInventoryType is a mandatory enumeration which is used to describe the purpose of this AvailableInventory instance. For the lender availability use case this should be set to "AvailableToLend"

  • The optional messageInformation type allows details related to a message containing the availability to be described if required.

  • The party attribute here describes all parties involved in this set of availability. For example, this could include the sender of the availability, the intended recipient, the beneficial owner(s), the lender (which may differ from the sender as the lender may have the same piece of availability going through multiple agents), an agent or a venue.

  • Each of the parties included in the party type can be assigned a partyRole. The ValidPartyRole condition within AvailableInventory restricts the types of role that can be assigned in this context. Valid roles are: "AgentLender", "BeneficialOwner", "Borrower", "Custodian" or "Lender"

  • The availableInventoryRecord record is where the securities that are to be shown as available should be listed.

AvailableInventoryRecord​

The AvailableInventoryRecord type is an array that is used to hold the list of availability records that the lender wants to broadcast. Each availability record will need to include details of the security and any associated criteria e.g. the quantity of shares available, the rate at which the security is available to borrow at.

This type inherits additional mandatory types from the generic InventoryRecord type which it extends.

type InventoryRecord:
    identifer AssignedIdentifier (1..1) 
    security Security (1..1)

The identifier and security should be used as follows:

  • The identifier type is mandatory and is used to assign a specific reference to this availability record. This allows the parties to uniquely identify any row of availability.

  • The security type allows the key security information to be provided, including the securityType and identifier for the instrument.

The AvailableInventoryRecord itself allows the most common datapoints shared when distributing availability to be specified. 

type AvailableInventoryRecord extends InventoryRecord: 
    expirationDateTime zonedDateTime (0..1) 
    collateral CollateralProvisions (0..*) 
    partyRole PartyRole (0..*) 
    quantity Quantity (0..1) 
    interestRate Price (0..1)

These attributes are all optional and should be used as follows:

  • Where a time limit/restriction needs to be set against a piece of availability then the expirationDateTime attribute can be used to express it.

  • The collateral type allows the lender to specify the type of collateral required for a specific piece of availability.

  • In this context the partyRole is primarily used to reference parties that have already been defined in the party attribute of the top level AvailableInventory type. It can also be used here to define the role of a party at the individual security level if necessary (which could be required if a security is held by multiple agents). There is a ValidPartyRole condition within AvailableInventoryRecord that restricts the types of role that can be assigned in this context to: "AgentLender", "BeneficialOwner", "Custodian" or "Lender".

  • The quantity attribute can be used to specify the number of shares that are available. Note that this attribute is optional, the lender may want to only broadcast the fact that they have a security available to drum up interest.

  • The interestRate attribute allows the lender to specify a rate that is required for a piece of availability. The InterestRate condition within AvailableInventoryRecord ensures that the interestRate -> priceType is set to "InterestRate" if interestRate is included here.

Examples​

In this section some examples of valid JSON describing availability are provided. Several different examples are provided to assist the user when attempting to model their own availability.

Single security​

In this very simple example a party is broadcasting their availability for a single ISIN. Very limited details are provided implying that this is general availability targeted at the entire market.

{
    "availableInventoryType": "AvailableToLend",
    "availableInventoryRecord": [
        {
            "identifier": {
                "identifier": "00001"
            },
            "security": {
                "securityType": "Equity",
                "productIdentifier": {
                    "identifier": "GB00000000012",
                    "source": "ISIN"
                }
            },
            "quantity": {
                "value": 10000
            }
        }
    ]
}
Multiple securities​

Building upon the last example, in this example a party is broadcasting their availability for two ISINs.

This time the party has not included the number of shares that they have available for the first ISIN, "GB00000000012", forcing borrowers to request more details before a deal can be negotiated.

For the second ISIN, "GB00000000013", they have included some specific lending criteria to help the borrowers decide if they want to proceed with a loan.

{
    "availableInventoryType": "AvailableToLend",
    "availableInventoryRecord": [
        {
            "identifier": {
                "identifier": "00001"
            },
            "security": {
                "securityType": "Equity",
                "productIdentifier": {
                    "identifier": "GB00000000012",
                    "source": "ISIN"
                }
            }
        },
        {
            "identifier": {
                "identifier": "00002"
            },
            "security": {
                "securityType": "Equity",
                "productIdentifier": {
                    "identifier": "GB00000000013",
                    "source": "ISIN"
                }
            },
            "quantity": {
                "value": 1800000
            },
            "interestRate": {
                "priceType": "InterestRate",
                "value": 0.025,
                "unit": {
                    "currency": "GBP"
                }
            }
        }
    ]
}
Securities held by an agent lender​

In this final example, an agent lender is broadcasting the availability that they have for a single security. They specify that they require other securities as collateral in a loan using this piece of availability (as they have set the collateral -> collateralType enumeration to "NonCash").

The details of the agent lender are also included so recipients of the availability will know that they are acting as an agent in this instance.

{
    "availableInventoryType": "AvailableToLend",
    "party": [
        {
            "partyId": {
                "identifier": {
                    "value": "AGENT1"
                }
            },
            "name": {
                "value": "Agency Services Limited"
            },
            "meta": {
                "globalKey": "x123rt",
                "externalKey": "agent1"
            }
        }
    ],
    "partyRole": [
        {
            "partyReference": {
                "globalReference": "x123rt",
                "externalReference": "agent1"
            },
            "role": "AgentLender"
        }
                
    ],
    "availableInventoryRecord": [
        {
            "identifier": {
                "identifier": "00001"
            },
            "security": {
                "securityType": "Equity",
                "productIdentifier": {
                    "identifier": "GB00000000013",
                    "source": "ISIN"
                }
            },
            "quantity": {
                "value": 20000
            },
            "collateral": [
                {
                    "collateralType": "NonCash"
                }
            }
        }
    ]
}

Modelling the borrower request​

When a borrower needs a security to cover a short position, or for some other trading strategy, they can approach specific lenders or the general market to locate the shares that they need. The model represents this using two types: SecurityLocate and AvailableInventoryRecord.

SecurityLocate

SecurityLocate is designed to hold a list of AvailableInventoryRecord items, with each item within AvailableInventoryRecord representing a specific security that the borrower is looking to locate. Thus, for a borrower to locate 10 different securities, the structure required would consist of one SecurityLocate with a list of 10 AvailableInventoryRecord items within it.

SecurityLocate​

As described above, SecurityLocate is used to hold the entire set of securities that the borrower wants to locate. This is where details that pertain to the overall request should be specified. 

type SecurityLocate extends AvailableInventory:

Note: SecurityLocate is an extension of AvailableInventory and thus inherits all the data points from within it.

type AvailableInventory: 
    availableInventoryType AvailableInventoryTypeEnum (1..1) 
    messageInformation MessageInformation (0..1) 
    party Party (0..*) 
    partyRole PartyRole (0..*) 
    availableInventoryRecord AvailableInventoryRecord (0..*)

The attributes available in SecurityLocate are thus:

  • The availableInventoryType is a mandatory enumeration which is used to describe the purpose of this SecurityLocate instance. For the borrower request use case this should be set to "RequestToBorrow"

  • The optional messageInformation type allows details related to a message containing the request to be described if required.

  • The party attribute here describes all parties involved in this request. For example, this could include the sender of the request, the intended recipient, the beneficial owner(s), the lender, an agent or a venue.

  • Each of the parties included in the party type can be assigned a partyRole. The ValidPartyRole condition within SecurityLocate restricts the types of role that can be assigned in this context. Valid roles are: "AgentLender", "BeneficialOwner", "Borrower", "Custodian" or "Lender"

  • The availableInventoryRecord record is where the securities that are being requested should be listed. The RequestOneSecurityMinimum condition enforces the presence of at least one availableInventoryRecord here, as a request must include at least one security.

AvailableInventoryRecord​

The AvailableInventoryRecord type is an array that is used to hold the list of securities that the borrower wants to locate. Each record will need to include details of the security and optionally include any associated criteria e.g. the quantity of shares the borrower requires.

This type inherits additional mandatory types from the generic InventoryRecord type which it extends.

type InventoryRecord:
    identifer AssignedIdentifier (1..1) 
    security Security (1..1)

The identifier and security should be used as follows:

  • The identifier type is mandatory and is used to assign a specific reference to this request. This allows the parties to uniquely identify any request.

  • The security type allows the key security information to be provided, including the securityType and identifier for the instrument.

The AvailableInventoryRecord itself allows the most common datapoints shared when requesting securities to be specified. Note that in the context of a borrower request, a lot of these datapoints will not be required.

type AvailableInventoryRecord extends InventoryRecord: 
    expirationDateTime zonedDateTime (0..1) 
    collateral CollateralProvisions (0..*) 
    partyRole PartyRole (0..*) 
    quantity Quantity (0..1) 
    interestRate Price (0..1)

These attributes are all optional and should be used as follows:

  • Where a time limit/restriction needs to be set against a request for a security then the expirationDateTime attribute can be used to express it.

  • The collateral type allows the borrower to specify the type of collateral that they are looking to use for a loan against this security.

  • In this context the partyRole is primarily used to reference parties that have already been defined in the party attribute of the top level SecurityLocate type. It can also be used here to define the role of a party at the individual security level if necessary. There is a ValidPartyRole condition within AvailableInventoryRecord that restricts the types of role that can be assigned in this context to: "AgentLender", "BeneficialOwner", "Custodian" or "Lender".

  • The quantity attribute can be used to specify the number of shares that
    the borrower requires.

  • The interestRate attribute allows the borrower to specify the rate that they are looking to pay for a loan against this security. The InterestRate condition within AvailableInventoryRecord ensures that the interestRate -> priceType is set to "InterestRate" if interestRate is included here.

Examples​

In this section some examples of valid JSON describing borrower requests are provided. Several different examples are provided to assist the user when attempting to model their own requests.

Single security​

In this very simple example a borrower is requesting if any lenders have a single ISIN available for them to borrow. No parties are specified implying that this is a general request targeted at the entire market.

Note that no quantity is specified either, the borrower is first seeing who has any availability for this security.

{
    "availableInventoryType": "RequestToBorrow",
    "availableInventoryRecord": [
        {
            "identifier": {
                "identifier": "00001"
            },
            "security": {
                "securityType": "Equity",
                "productIdentifier": {
                    "identifier": "GB00000000012",
                    "source": "ISIN"
                }
            }
        }
    ]
}
Single security from a particular lender​

In this example, rather than the borrower sending a request to the entire market, they have specified the agent lender that they want to borrow this ISIN from. They have also included their own party details, setting themselves as the borrower.

This time the party has also included the number of shares that they would like to borrow.

{
    "availableInventoryType": "RequestToBorrow",
    "party": [
        {
            "partyId": {
                "identifier": {
                    "value": "BORROWER1"
                }
            },
            "name": {
                "value": "ACME Bank"
            },
            "meta": {
                "globalKey": "pe4h12",
                "externalKey": "borrower1"
            }
        },
        {
            "partyId": {
                "identifier": {
                    "value": "AGENT1"
                }
            },
            "name": {
                "value": "Agency Services Limited"
            },
            "meta": {
                "globalKey": "x123rt",
                "externalKey": "agent1"
            }
        }
    ],
    "partyRole": [
        {
            "partyReference": {
                "globalReference": "pe4h12",
                "externalReference": "borrower1"
            },
            "role": "Borrower"
        },
        {
            "partyReference": {
                "globalReference": "x123rt",
                "externalReference": "agent1"
            },
            "role": "AgentLender"
        }       
    ],
    "availableInventoryRecord": [
        {
            "identifier": {
                "identifier": "00001"
            },
            "security": {
                "securityType": "Equity",
                "productIdentifier": {
                    "identifier": "GB00000000012",
                    "source": "ISIN"
                }
            },
            "quantity": {
                "value": 1800000
            },
        }
    ]
}
Multiple securities from multiple lenders​

In this final example the borrower is now sending a request for two securities to two agent lenders. Once again they have included their party details too.

This time the party has included the number of shares that they would like to borrow for one of the securities, but not for the other.

{
    "availableInventoryType": "RequestToBorrow",
    "party": [
        {
            "partyId": {
                "identifier": {
                    "value": "BORROWER1"
                }
            },
            "name": {
                "value": "ACME Bank"
            },
            "meta": {
                "globalKey": "pe4h12",
                "externalKey": "borrower1"
            }
        },
        {
            "partyId": {
                "identifier": {
                    "value": "AGENT1"
                }
            },
            "name": {
                "value": "Agency Services Limited"
            },
            "meta": {
                "globalKey": "x123rt",
                "externalKey": "agent1"
            }
        },
        {
            "partyId": {
                "identifier": {
                    "value": "AGENT2"
                }
            },
            "name": {
                "value": "GTR Custody"
            },
            "meta": {
                "globalKey": "9wq8rg",
                "externalKey": "agent2"
            }
        }
    ],
    "partyRole": [
        {
            "partyReference": {
                "globalReference": "pe4h12",
                "externalReference": "borrower1"
            },
            "role": "Borrower"
        },
        {
            "partyReference": {
                "globalReference": "x123rt",
                "externalReference": "agent1"
            },
            "role": "AgentLender"
        },      
        {
            "partyReference": {
                "globalReference": "9wq8rg",
                "externalReference": "agent2"
            },
            "role": "AgentLender"
        }
    ],
    "availableInventoryRecord": [
        {
            "identifier": {
                "identifier": "00001"
            },
            "security": {
                "securityType": "Equity",
                "productIdentifier": {
                    "identifier": "GB00000000012",
                    "source": "ISIN"
                }
            },
            "quantity": {
                "value": 1800000
            },
        },
        {
            "identifier": {
                "identifier": "00002"
            },
            "security": {
                "securityType": "Equity",
                "productIdentifier": {
                    "identifier": "GB00000000010",
                    "source": "ISIN"
                }
            }
        }
    ]
}

Trade Negotiation​

The following description of a trade negotiation is based upon a more in depth analysis on negotiating a securities lending trade undertaken by ISLA. A full discussion of the process can be found on the ISLA website

The CDM is built upon the concept of workflows. Each workflow can be broken down into a series of steps. Each step holds the data required to transition a trade from one state to another.

One party can propose a new step in a workflow, and another party (or parties) can accept or reject the proposal. If the proposal is accepted, then the outcome is a new business event. If the proposal is rejected, then no event is generated, and the workflow stops at this point.

This process of proposing, rejecting or accepting steps in a workflow can be used to model a trade negotiation through to execution.

Securities Lending example​

In its simplest form, a borrower will propose a new trade execution to a lender, sending them the details of the trade as they see it. The lender will accept the proposed trade and a trade execution business event will be generated. This is a standard Propose-Accept workflow.

Note: Additional workflows, including where a lender rejects a proposal or offers a counter proposal, are described in more detail in the previously referenced document available from the ISLA website.

Modelling​

To model this basic Propose-Accept workflow we need to use the elements inside the WorkflowStep type:

type WorkflowStep: 
    [metadata key]
    [rootType]

    businessEvent BusinessEvent (0..1) 
    counterpartyPositionBusinessEvent CounterpartyPositionBusinessEvent (0..1) 
    proposedEvent EventInstruction (0..1) 
    rejected boolean (0..1) 
    approval WorkflowStepApproval (0..*) 
    previousWorkflowStep WorkflowStep (0..1) 
        [metadata reference]
    nextEvent EventInstruction (0..1) 
    messageInformation MessageInformation (0..1) 
    timestamp EventTimestamp (1..*) 
    eventIdentifier Identifier (1..*) 
    action ActionEnum (0..1) 
    party Party (0..*) 
    account Account (0..*) 
    lineage Lineage (0..1) 
        [deprecated]
    creditLimitInformation CreditLimitInformation (0..1)
    workflowState WorkflowState (0..1)

The main items that will be used for this example workflow are:

  • businessEvent is used when an event has been successfully approved
  • proposedEvent holds the details of the event that is being proposed
  • approval allows each party involved in a workflow to set whether they approve the event that is being proposed
  • previousWorkflowStep holds the lineage of all steps in the workflow
  • eventIdentifier holds a unique identifier for this event
  • party can be used to hold parties involved in the workflow

Other elements can be used but for this example we will just be describing the usage of these items.

Propose​

In this trade negotiation example, the core data is a new proposed event, which is a trade execution being proposed by the borrower. The details of the execution are held in proposedEvent which is an instance of EventInstruction. This should describe the parties on the trade, the instrument being loaned and the economic terms of the trade.

As this is a new proposed event, there is no business event as yet, so the businessEvent will not be included in this workflow step. Similarly, this is the first step in the workflow for this event, so there will be no previous workflow steps either, so previousWorkflowStep will also not be included at this point.

An identifier for the trade will be required which should be placed within the eventIdentifier.

In order for the proposed execution to become an actual business event both parties to the trade must approve the details of the trade held in proposedEvent. This is controlled using approval, where all parties to the event are defined along with whether they have approved the event or not.

When the borrower proposes the new trade execution they will set their approval status to True and the approval status of the lender party to False.

This WorkflowStep can now be passed to the lender who will decide whether the terms of the proposed trade held in proposedEvent are acceptable.

Accept​

Once the lender receives a WorkflowStep containing a proposedEvent for a new trade they can then decide whether they accept the terms of the execution or not.

If the lender decides that the terms are acceptable then they will need to send a WorkflowStep back to the borrower confirming this. This time the details of the trade will be in businessEvent as opposed to being in proposedEvent, as the lender is essentially agreeing the terms of the execution as held in the proposedEventfrom the workflow step that they received from the borrower.

The approval status of the lender party in the new workflow step should be updated to True. The approval status of the borrower party should already be set to True from the previous workflow step; thus approval in the new workflow step should now have both the borrower and lender approval statuses both set to True.

The new WorkflowStep must also now include a previousWorkflowStep. The WorkflowStep object that the lender received holding the proposed trade execution from the borrower must be copied into the previousWorkFlowStep. This preserves the lineage of the negotiation and will allow both the lender and borrower applications to inspect the entire negotiation process should they need to.

Note The details from the original proposedEvent must not be updated when they are put into the previousWorkflowStep. This is because the JSON that the CDM generates can contain metadata references, which need to be preserved so that the references still work correctly.

Functions​

There are several functions available in the CDM to help generate the workflow steps required to perform the negotiation of events like a trade execution. A brief description of some of the functions are provided here. More details and additional functions can be reviewed in the model itself.

Creating a proposal​

To start the negotiation process a party will need to create a new WorkflowStep with the details of the trade execution held in the proposedEvent within it.

This can be done using the Create_ProposedWorkflowStep function.

Accepting a proposal​

If a party is happy with a proposal that they have received then they will need to notify the other party that they have accepted the proposal. This can be done by generating a new workflow step that holds a businessEvent rather than a proposedEvent.

This can be done by using the Create_AcceptedWorkflowStepFromInstruction function.

Rejecting a proposal​

If a proposal is not acceptable, and the party does not want to continue the negotiation, then the party can send a rejection to the other party. This is achieved by sending a new WorkflowStep back with the rejected attribute set to True.

This can be done by using the Create_RejectedWorkflowStep function.