All corporate treasury departments deal in one or more of the following financial instruments: FX, money market, interest rate derivatives, equities and commodities. Mostly the corporate treasury department use the Ask, Bid and Accept dealing systems in which the corporate treasury department asks the market maker(s) what is their price for a given amount of the financial instrument, the market maker(s) make their bid(s) for the business, and then the corporate treasury department accepts one of the bids. Corporate treasury departments can either deal direct with their bank(s) or use one of the online multi-counterpart FX and money market trading platforms. The majority of corporate treasury departments trades are now carried out on the multi-counter party trading platforms. Some corporate treasury departments automated the whole dealing process integrating their cash and treasury management system using SWIFT for collecting bank balance reports and sending payments, a multi-counterparty e-trading service and a confirmation service as figure below shows.
Fully Automated Dealing Structure
Source: J&W Associates Copyright© 2011
Typical Trading Life Cycle
In dealing and trading there are significant opportunities for fraud and losses, so all corporate treasury departments have treasury policies and trading strategies that specify dealing and trading procedures and controls to eliminate un-authorised transactions. The trade life cycle will typically include:
- the corporate treasury department, subsidiary or operating units request bid(s) for FX, investment or borrowing. Most departments' treasury policy require competitive price quotes from an agreed set of counter parties to ensure that deals are transacted at market prices
- deal authorisation: process varies depending on the size of the deal and typically includes monitoring counter-party limits
- logging of all completed trades
- allocation of trades including any approved amendments
- confirmation of deal(s) by the market maker
- settlement and completion of accounting.
Corporate treasury departments ring their dealers direct for more complex deals or they can use the online trading platforms and, where necessary, the specialist confirmation services.
Other Types of Trading System
There are two other types of financial instrument dealing / trading systems: cross-matching systems and auction systems.
Cross-matching systems provide real-time or periodic cross-matching sessions for dealers and institutional investors. Customers are able to enter anonymous buy and sell orders with multiple counter parties which are automatically executed when contra side orders are entered at the same price or when the posted prices are "hit". In some cases, customers are able to initiate negotiation sessions to establish the terms of trades. These systems typically allow users to execute complex portfolio strategies that incorporate multiple orders in different securities. Cross-matching systems are typically multi- counter-party.
Financial auction systems are typically used by government to sell their bonds. Auctions are also used in repo markets, selling of receivables and of payables.