6 Confirmation and Settlement

Controls over the trade after execution. Good confirmation and settlement reduce ambiguity, operational error, liquidity pressure, fraud and counterparty exposure. The examination tests the controls and the key data.

6.1 Confirmation and Settlement Systems/Frameworks

Systems should support timely, accurate confirmation and settlement through the full transaction lifecycle. Capacity, straight-through processing and data integrity are control objectives, not merely technology preferences.

6.1.1 Processing Capacity

Capacity should handle normal and peak volumes, including market disruption. Capacity planning, testing, monitoring and contingency arrangements reduce operational and settlement risk.

6.1.2 STP

Straight-through processing passes accurate data from trade capture to confirmation, settlement and accounting with minimal manual re-entry. Exceptions still require controlled human review.

6.1.3 Data Integrity

Trade data should be complete, accurate, consistent, authorised and protected from unauthorised change. Reconciliations, validation and audit trails help detect corruption or processing errors.

6.2 Confirmation Procedures

Confirmations should be generated as soon as practicable, independently checked where appropriate and matched against the counterparty. The procedure should address block trades, discrepancies and product-specific data.

6.2.1 Segregated Functions

The person who executes a trade should not have unrestricted control over confirmation, settlement and reconciliation. Segregation reduces the ability to hide errors or fraud.

6.2.2 As Soon As Practicable

Timely confirmation reduces uncertainty and allows errors to be corrected before value date. The appropriate timing depends on product and convention, but avoidable delay is a control weakness.

6.2.3 Key Confirmation Data

Key data includes parties, capacity, product, amount, price or rate, trade and value dates, settlement currency, payment instructions, fees, netting and special terms. Missing data can change the economics.

6.2.4 Single Party

Where a single party is responsible for producing a confirmation or matching record, the process should still include independent controls, counterparty communication and exception monitoring.

6.2.5 Auto-Generated

Auto-generated confirmations can improve speed and reduce re-keying, but only if source data, templates, access rights, change controls and exception handling are reliable.

6.2.6 Block Transactions

Block trades need an allocation process that preserves the economics, identifies each beneficiary and controls the timing and accuracy of confirmations. Unallocated blocks should not be allowed to obscure exposure.

6.2.7 Discrepancy Resolution

A mismatch should be investigated, documented and resolved by authorised staff. The firm should not silently amend records or let an unresolved discrepancy pass through settlement.

6.2.8 Product-Specific

Confirmation content must reflect the product: options need exercise and premium terms, swaps need both legs, NDFs need fixing provisions, and securities need price and accrued-interest conventions.

6.3 Settlement Procedures

Settlement procedures reduce principal, liquidity, operational and counterparty risk through reliable instructions, controls, netting, payment authorisation and monitoring.

6.3.1 Mitigating Settlement Risk

Use delivery-versus-payment where available, valid standing instructions, cut-off monitoring, segregation, confirmation matching and escalation of late or failed payments.

6.3.2 Netting

Netting reduces the number and value of payments when legally and operationally available. The firm must confirm enforceability, scope, currency, cut-off and the parties covered by the netting arrangement.

6.3.3 Direct Payments

Payments should normally go to the counterparty or its approved account. A third-party payment requires a valid, documented reason, appropriate approval and controls against fraud and money laundering.

6.4 Standing Settlement Instructions

SSIs should be verified, authorised, changed through controlled procedures and independently checked. A last-minute instruction change is a common fraud risk and must not be accepted casually.

6.5 Nostro Balance Requirements

Nostro accounts must have sufficient balances and monitoring to make expected payments. Forecasts, intraday liquidity, cut-offs and escalation for shortfalls protect settlement performance.

6.5.1 SGD Payments

SGD payments require attention to local settlement systems, MAS or market cut-offs, payment instructions and contingency procedures. A disruption should be managed with the agreed market process.

6.6 Account Reconciliation

Reconcile nostro, custody, trading and accounting records promptly. Breaks should be aged, investigated, assigned and escalated; a reconciliation that is only performed after a loss is not an effective control.

6.7 Late-Payment Penalties

Late-payment terms and penalties should be clear in the trade or governing agreement. The firm should calculate, communicate and settle them accurately, while escalating repeated failures.

Exam cues

• Control objectives: timely, accurate confirmation and settlement — capacity, straight-through processing and data integrity.
• Segregation: the person who executes must not control confirmation, settlement and reconciliation.
• Key confirmation data: parties, capacity, product, amount, price/rate, trade and value dates, settlement currency, payment instructions, fees, netting and special terms.
• Standing Settlement Instructions: verify, authorise and independently check; a last-minute instruction change is a common fraud risk.
• Settlement controls: delivery-versus-payment, netting (only where legally enforceable), payments to the counterparty’s approved account, nostro-balance monitoring, prompt reconciliation and aged-break escalation.
• Trap: an unresolved discrepancy must never pass silently through settlement.

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