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ICMA Executive Education

Operations Certificate Programme (OCP)

Programme Syllabus

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Contents

1 Introduction p3

2 Accreditation p4

3 Delegate Assessment p4

4 Delegate Communication with ICMA EE p5

5 Background Reading p5

6 Programme Schedule p6

6 Structure of the SOFC Syllabus p7>

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1. Introduction

The Operations Certificate Programme (OCP) is an intermediate level qualification intended for anyone having existing but narrow experience in the financial markets, particularly within the areas of operations (back office) and middle office, and other non-front office areas such as risk management, data management, accounting, collateral management and IT. Attendance of the programme requires an understanding of a number of fundamental and generic operations concepts, including securities operations concepts. Pre-course reading is provided to allow candidates to acquire a certain fundamental layer of understanding of the subject matter. The training programme is designed to provide a framework within which delegates will gain a thorough foundation of understanding relating to the processing of:

Securities o securities trades (equity and debt) o securities financing transactions (repo and securities lending & borrowing) o corporate actions (equity and debt)

Derivatives o OTC derivative trades o OTC Derivative-related collateral management o central clearing of OTC Derivatives and collateral implications.

The programme focuses primarily on operational processing, highlighting 1) the actions that facilitate timely and secure processing, 2) the internal and external processing risks, and 3) the controls necessary to mitigate such risks. The programme covers both conceptual and practical aspects of securities operations, derivative operations and collateral management. Additionally, a number of regulatory initiatives are explained, including the impact on operational processing. Throughout the course delegates can expect a large amount of information to be imparted in a rapid but structured fashion and in a logical sequence of key concepts, beyond which the practical aspects of day-to-day operations tasks will be described. In order to ensure focus and to test the delegates’ understanding of concepts, simulations and exercises will be introduced at numerous points during the programme. Furthermore, the instructor will expand concepts and make connections to prior concepts in order to make the delegates’ understanding as complete as possible.

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Although not a formal prerequisite for any other ICMA training course, the OCP provides useful background study for those taking the following ICMA specialised courses (1), in particular:

Course Type

Course Title

Specialised Corporate Actions Securities Lending & Borrowing Collateral Management

The academic content of the OCP certificate has been created by the ICMA, University of Reading and then reviewed by market practitioners from the operations and middle office areas of financial institutions.

2. Accreditation The OCP is jointly certified by the International Capital Market Association (ICMA) and the University of Reading as a Level II course (2) providing competence in the understanding of the operational functions within the securities industry.

3. Delegate Assessment The OCP certificate incorporates the following structure:

1. Pre-course reading (see Background Reading below) 2. 5-days of instructor led training delivered in multiple sections, including multiple

delegate simulations and exercises across a spectrum of operational concepts 3. 30 minute review sessions at the end of Days 1 – 4, plus a free revision session

on Day 5 afternoon 4. On Day 6 morning, candidates sit a 3-hour examination comprising 75 multiple-

choice questions. Delegates who are successful in passing the examination will receive a certificate granted jointly by ICMA and the University of Reading. To be successful, delegates must correctly answer 45 or more of the 75 questions (i.e. 60%). A ‘distinction’ is awarded to candidates who score 68 correct answers or more (i.e. 90%).

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Delegates should bring to the course a basic calculator for use during the course; such calculators will be permitted during the examination. No other types of calculator are permitted during the examination. Delegates who are not successful in passing the examination on the first attempt may take a re-sit. There is no restriction to the number of re-sits that may be taken.

4. Delegate Communication with ICMA Executive Education

Once registered on the course, delegates will receive the following items: • Hard copy instructions for accessing Blackboard, ICMA EE’s online learning management system. (Delegates will additionally be sent these instructions by e-mail.) • A physical copy of the course book - ‘Securities Operations: A Guide to Trade and Position Management’, author Michael Simmons, publisher Wiley Finance.

5. Background Reading

In order for delegates to gain the necessary understanding in readiness for attending the course, delegates will be provided with a physical copy of the course book.

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6. Programme Schedule Day 1

From To Session

08:30 12:30 The Securities Trade Lifecycle

13:15 13:30 Securities Bookkeeping

13:30 18:00 The Securities Trade Lifecycle Simulation

Day 2

From To Session

International Securities Financing Transactions

08:45 12:45 Repo

13:30 15:00 The Repo Trade Lifecycle Simulation

15:15 16:30 Other Repo Structures

16:45 18:15 Securities Lending & Borrowing

Day 3

From To Session

08:30 16:00 Corporate Actions

16:00 18:00 Regulatory Initiatives Impacting Securities Operations

Day 4

From To Session

08:30 09:45 Derivative Fundamentals

10:00 11:00 OTC Derivatives: An Introduction

11:15 12:45 OTC Derivative Products & Their Processing Characteristics

13:30 15:45 Collateral Management for OTC Derivatives

15:45 18:00 The OTC Derivative Collateral Lifecycle

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Day 5

From To Session

08:30 10:00 The OTC Derivative Collateral Lifecycle (continued)

10:15 11:00 Regulatory Change for OTC Derivatives

11:00 14:15 Central Clearing & its Impact on Collateral Management

14:15 14:30 Central Clearing & Collateral Transformation

15:00 - Free Revision Session

Day 6

From To Session

09:00 12:00 Examination

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7. Structure of the OCP Syllabus

Days 1 – 3: Securities Operations The first 3 days of the course cover various important and challenging subjects, all of which fall under the heading of Securities Operations.

Day 1: The Securities Trade Lifecycle The starting point of the course is the Securities Trade Lifecycle. The primary objective in trade processing is for the trade to settle on its due date. Reaching that objective is not accomplished by the completion of one single task; instead, timely settlement results from a range of consecutive tasks, each of which builds upon the successful completion of the prior task. These tasks are collectively known as the Securities Trade Lifecycle. which a firm must abide on a daily basis, in order for its exposures to be mitigated.

Orders

Purpose

Who Issues Orders?

Order Content

Order Processing

Trade Execution

Order-Driven Markets

Quote Driven Markets

Exchange-Traded vs OTC

Trade Capture (Front Office)

Capture Methods

Components

EU Commission: New Settlement Cycles

Speed

Accuracy

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Trade Capture (Operations)

Implications of Successful Capture

Facilitating Successful Capture

Identifying Failed Capture

Implications of Failure to Capture

Reasons for Failed Capture

Trade Enrichment

Purpose

What’s Added to Basic Trade Details

Achieving Automated Enrichment

Importance of Static Data

Trade Agreement

Purpose

Methods

Trade Confirmation (manual, electronic),

Trade Affirmation (Oasys Global),

Implications of Failing to Agree

Settlement Instructions

Purpose

Instruction Types

Instruction Methods

Instruction Content

Time-Zone Differences

Implications of Failing to Instruct

Risks

Settlement Instruction Statuses

Purpose

Status Types & Meaning

Corrective Action

Root Causes of Unmatched Instructions

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Failed Settlement

Definition

Impacts

Causes

Prevention

Partial Settlement

Enforcing Settlement

EU Commission: New Fining & Buy-In Rules

Trade Settlement

Definition

Causes of Successful Settlement

Full Settlement

Partial Settlement

Securities Only Settlement

Cash Only Settlement

Gross versus Net Settlement

Updating Books & Records

Definition

Purpose

Method of Update

Impact of Successful Update

Reconciliation

Definition

Purpose

Types

Methods

Risks

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Day 1: Securities Bookkeeping If an Operations professional is to understand the processing nuances of a variety of transaction types, that task will be made considerably easier if the fundamental method of accounting for such transactions is understood. This is a structured method of determining/analysing the implications of processing a range of transaction types including buy/sell, repos, securities lending & borrowing, incoming & outgoing collateral, corporate actions.

Securities Bookkeeping

Definition & Purpose

Importance of Accurate Books & Records

Double-Entry Bookkeeping

When Entries Must be Passed: Trades

Application in Different Transaction Types

Day 1: The Securities Trade Lifecycle Simulation The securities trade lifecycle simulation involves all delegates, where each delegate forms part of a trading firm; there are multiple trading firms. After each firm decides upon its internal structure, they will execute securities trades with all other firms, following which each component of the trade lifecycle will be undertaken by each firm, for each trade they have executed. This simulation is extremely interactive requiring a high level of internal teamwork and communication with external parties. The simulation is scheduled to run for a minimum of 4 hours. The purpose of the simulation is for delegates to confirm/increase their understanding of each securities trade lifecycle component, to appreciate the inter-relationships between each component, and to understand the positive and negative knock-on effects of their actions, the actions of their colleagues’ and the actions of counterparties and CSDs. The purpose also includes having the delegates working in a close-knit team, to appreciate the importance of good and timely communication.

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Day 2: International Securities Financing Transactions Introduction: the practice of securities financing utilises securities held by a firm to 1) secure a cash borrowing or to 2) lend such equities and bonds in return for additional revenue. During the lifetime of a securities financing trade, the daily movement in the market value of the securities involved causes exposures that each firm must mitigate. Such transactions cause multiple securities &/or cash movements during their lifetime, all of which must be settled in a timely manner if risks are to be mitigated.

Day 2: Repo For many sell-side firms, the funding costs of maintaining proprietary positions is a reality that must be faced constantly, therefore keeping funding costs to a minimum is paramount if a firm is to maximise its trading profits. The borrowing of cash versus bonds given as collateral is a popular method of minimising funding costs.

The Instrument

Transaction Structure and Mechanics

Market Conventions

Principal Purposes and Drivers

Terminology

Collateral Issues

Valuation of Collateral

Initial Margin/Haircut

Marking-to-Market & Margin Maintenance

Right of Substitution of Collateral

Custody & Settlement (Delivery, HIC, Tri-Party)

What Happens in a Default

Failure to Deliver Collateral

Legal Documentation (GMRA)

Key Features

Legal Structure: Title Transfer

Comparison with Secured Loans

Economic Effect: Borrowing and Lending

Treatment of Collateral Income

Credit and Liquidity Risk

Implications for Accounting of Repo (Repo 105)

Basic Tax Issues

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Synthetic Repo

Specials and GC Repo

General Collateral

GC repo Rate & Spreads to Unsecured

Specials

Specials Drivers, Patterns of Specialness

Comparison with Securities Lending

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Day 2: The Repo Trade Lifecycle Simulation

The repo trade lifecycle simulation involves all delegates, where each delegate forms part of a trading firm. The basic details of a repo trade are provided to the delegates, following which each firm is required to determine the calculations and other actions necessary to achieve timely settlement of the trade 1) at the start of the trade, 2) during the lifetime of the trade, and 3) at the close of the trade. This simulation involves a large number of calculations (designed to prove conceptual understanding) and is scheduled to be run for between 60 – 90 minutes. The purpose of the simulation is for delegates to confirm/increase their understanding of each repo trade lifecycle component, to appreciate the inter-relationships between each component, and to understand the positive and negative knock-on effects of their actions. The purpose also includes having the delegates working in a close-knit team, to appreciate the importance of good and timely communication

The Repo Trade Lifecycle Overview Opening Leg Settlement

Settlement of Cash versus Collateral

Throughout Life of Transaction

Introduction

Marking-to-Market

Bond Accrued Interest

Repo Interest to Date

Margin Calls

Collateral Substitution

Income Payments

Corporate Actions

Closing Leg Settlement Updating Books & Records

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Day 2: Other Repo Structures A variety of structures fall within the heading of ‘repo’, and this section introduces a number of the most common types.

Other Repo Structures

Repurchase Agreements

Sell/Buy-Back (and forward price)

Floating Rate Repo

Open Repo

Forward Repo

Term Repo

Collateral Up/Downgrade

Collateral Transformation/Liquidity Swaps

Tri-party Repo

o Structure

o Basic Operations

o Collateral Selection and Optimisation

o Re-use Facilities

o European vs US Tri-party

Market Structure

o Size and Composition of the Market

o Electronic Trading

o Central Counterparties

o GC Financing/Pooling

o Repo Trade Repositories

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Day 2: Securities Lending & Borrowing For both buy-side and sell-side firms, the equities and bonds they own can be made to generate further revenue if the firm is prepared to lend such securities. Other firms need to settle sales of securities in a timely fashion, and so such firms become securities borrowers. In order to mitigate the securities lender’s risk, the securities borrower must provide collateral in the form of cash or other securities.

The Instrument

Transaction Structures

Terminology

Principal Purposes & Drivers (Lending & Borrowing)

Legal and Economic Structure

Lender’s Right of Recall

Borrower’s Right of Return

Indemnification by Agent Lenders

Borrowing Fees

Securities Lending versus Repo

Market Structure

Size and Composition of the Market

End Users

Intermediaries

Collateral Issues

Initial Margin

Margin Maintenance

Cash Collateral Management

Collateral Delivery

Custody and Settlement (Bilateral & Tri-party)

Treatment of Collateral Income

Corporate Actions

Voting Rights

What Happens in a Default

Failure to Deliver Collateral

Legal Documentation (GMSLA)

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Day 3: Corporate Actions Equity and bond positions (and trades) are impacted by corporate action events that are either scheduled or announced by the issuer; trading positions, settled positions and open trades are all subject to adjustment. This topic contains numerous points of risk which many institutions have experienced to their cost. Knowledge of securities and their processing is incomplete without an understanding of this challenging topic. Numerous mini-calculation exercises are included within the topic, in addition to two major calculation exercises which are scheduled to run for approximately 30 minutes each.

Fundamental Concepts

Definition

Purpose

Issuer’s Objectives

Event Initiation

Event Classification

Ultimate Impact

Responsibilities of a Corporate Actions Dep’t

Major Processing Steps

Major Risks

Corporate Actions Lifecycles Overview

Processing Lifecycle Characteristics of:

o Mandatory Events

o Mandatory with Options Events

o Voluntary Events

:

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Event Type Characteristics & Impacts

Focus on Numerous Event Types, including:

o Cash Dividends

o Currency Option Dividends

o Dividend Reinvestment Plans

o Fixed-Rate & Floating-Rate Coupon Payments

o Bonus Issues

o Stock Splits, Reverse Splits

o Odd-Lot Offers

o Bond Conversions

o Final Maturity

o Early/Partial/Voluntary Redemptions

o Rights Issues

The Generic (Mandatory Event) Lifecycle: Overview

Overview of Each Major Step in the Mandatory Event Lifecycle, namely

o Declaration of Event Terms

o Capturing Event Terms

o Ascertaining Entitlement

o Informing Relevant Parties

o Calculating Resultant Entitlement

o Updating Books & Records #1

o Receiving & Crediting Resultant Entitlement

o Updating Books & Records #2

Tax on Income Events: Overview

Withholding Tax

Domestic Tax

Internal/External Securities Position Management

Over-Taxation

Tax Returns to Tax Authorities

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Optional & Voluntary Event Lifecycles; Overview

Characteristics of Optional & Voluntary Events

Differences vs the Mandatory Event Lifecycle

Associated Management Implications

Event Terms

Requesting Election Decisions

Monitoring Outstanding Election Decisions

Managing Incoming Election Decisions

Issuing Outgoing Election Instructions

Calculating Resultant Entitlement

Typical Deadlines

Processing Risks & Controls

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Day 3: Regulatory Initiatives Impacting Securities Operations Since the 2008 financial crisis, a number of regulatory measures have been introduced which have impacted primarily the front office of financial institutions. However, further regulatory measures specifically relating to securities, which will have a direct bearing on the activities managed by the securities operations department, are scheduled to come into effect from 2014. Three of such initiatives will be covered in this section, at overview level

CSD Regulation (CSDR) Overview

Objectives

Background

Key Elements

Impact

Target2 Securities (T2S) Overview

Definition

Current Issues

Objectives

Key Elements

Benefits

Impact

Foreign Account Tax Compliance Act (FATCA) Overview

Definition

Current Issues

Objectives

Key Elements

Impact

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Days 4 – 5: Derivative Operations and Collateral

Management

The latter part of the course introduces various important and challenging subjects including derivatives, OTC derivatives, collateral management and central clearing.

Day 4: Derivative Fundamentals Derivatives have become an extremely important group of products within the financial services industry. This section introduces the subject of derivatives, covering 1) the similarities and differences between exchange-traded derivatives and OTC derivatives, and 2) the elementary characteristics of the main types of derivative.

Derivative Fundamentals

Definition & Purpose

The Derivatives Marketplace

o Exchange Traded versus OTC Derivatives

o Derivative Exchanges

Basic Derivative Types

o Futures

o Options

o Swaps

Investment Appeal of Derivatives

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Day 4: OTC Derivatives; An Introduction

The group of products known as OTC Derivatives has become a major aspect of financial services; from a general Operations viewpoint, this is regarded as a specialist area. This section focuses on the common features of OTC derivative products and trades, and identifies the similarities and differences compared with the equivalent for securities trades. Additionally, the requirement for legal documentation (between the two trading parties) is explained, including how the operations department is impacted.

OTC Derivatives; An Introduction

Structural Aspects of OTC Derivatives

o Definition

o The OTC Derivative Product

o Parties

o Tenure

o Notional Principal Amount

o Rates

o Dates

o Settlement

o Exiting

Legal Documentation

o ISDA Master Agreement

o The Schedule

o Credit Support Annex

o Trade Confirmation

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Day 4: OTC Derivative Products & Their Processing Characteristics

Two streams of operational activity stem from trading in OTC derivatives, namely trade processing and collateral processing. This sub-section focuses more specifically on particular OTC derivative products, and explains the basic purpose of each product prior to describing their particular characteristics, including their trade processing, settlement and operational requirements (prior to describing the associated collateral processing activity). Delegates have an opportunity to prove their understanding via exercises relating to the products covered.

OTC Derivative Products & Their Processing Characteristics

Introduction

For each product listed below, the following aspects will be covered:

o Product Definition & Purpose

o Structure & Characteristics

o Interest & Premium Calculations

o The Trade Lifecycle

Example OTC Derivative Products

o Interest Rate Swaps

o Credit Default Swaps

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Day 4: Collateral Management for OTC Derivatives Price movements in OTC derivative trades give rise to the requirement to give and/or take collateral, and this practice has gained a very high profile since the 2008 financial crisis. The management of collateral relates to mitigation of exposures in OTC derivatives (and other products) and involves a defined series of processing steps. To date, collateral management has related to direct exposure with bilateral counterparties, but this will change from 2013-14. This section introduces collateral management relating to OTC derivatives, and in particular describes the rules by which a firm must abide on a daily basis, in order for its exposures to be mitigated.

Collateral Management for OTC Derivatives

Collateral Concepts for OTC Derivatives

o Risks in OTC Derivatives

o Contractual Obligations

o How Exposures Arise in OTCD

o Purpose of OTCD Collateral

o Collateral Differences vs Repo & SLB

o Increased Focus on Collateral

o Eligible Collateral in OTCD

o Value of Cash & Bond Collateral

Collateral Impact on Regulatory Capital: Overview

OTCD Collateral Lifecycle: Overview

Cash & Bond Collateral for OTC Derivatives

Credit Support Annex

o Definition & Purpose

o Base Currency

o Eligible Credit Support

o Independent Amount

o Threshold

o Minimum Transfer Amount

o Rounding

o Valuation & Timing

o Valuation Date & Time

o Notification Time

o Exchange Date

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Days 4 - 5: The OTC Derivative Collateral Lifecycle The calculation of exposures and the giving/taking of collateral relating to OTC

derivatives is a daily activity for many firms today. The collateral lifecycle is a

defined series of steps that typically results in the need for a firm to either give

collateral to, or to take collateral from, a counterparty.

Furthermore, as collateral may be in the form of cash or securities, deliveries and

receipts of securities can occur for reasons completely dis-associated with securities

trading. It is therefore important that an operations professional is aware of the

underlying reasons for such incoming & outgoing movements of securities.

Additional challenges of giving &/or taking securities collateral is the potential reuse

of such collateral (where permitted) and the impact on income processing.

This section incorporates a major simulation of 60 – 90 minute duration.

The OTC Derivative Collateral Lifecycle

Introduction

o The Collateral Lifecycle: Overview

Pre-Trading

o Legal Documentation

o Static Data

Trading

o Trade Execution

o Trade Capture

o Trade Confirmation

Throughout Lifetime of Trade

o Portfolio & Exposure Reconciliation

Definition & Purpose

Benefits

Method

Causes of Discrepancies

Discrepancy Resolution

o Marking-to-Market

Definition & Purpose

Method

o Collateral Call Calculation

Definition & Purpose

Frequency

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Uniqueness of Counterparty Arrangements

Determining Factors

o OTCD Collateral Calculation Simulation

o Making & Receiving Collateral Calls

Communicating Collateral Demands

Collateral Demand Deadlines

Receiving Collateral Demands

Issuing Collateral Demands

Agreeing Collateral Demands

Settling Cash & Bond Collateral

Holding Collateral Received

Title Transfer vs Security Interest

Reuse of Bond Collateral

o Collateral Substitution

Definition & Purpose

Circumstances Causing Substitution

Settling Collateral Substitutions

o Income Payments

Collateral Reuse vs Non-Reuse Scenarios

Impact on Collateral Giver & Taker

Trade Termination

o Termination on Scheduled Maturity Date

o Impact on Collateral

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Day 5: Regulatory Change for OTC Derivatives The introduction (during 2013-14) of an entirely new set of regulatory measures relating to OTC derivatives has an extreme impact on ongoing counterparty exposures, which in turn impacts collateral management which in itself is designed to mitigate risk. The implications, both from a trading and an operational perspective, are far-reaching in a number of senses, and will impact both sell-side and buy-side firms. This section introduces the background to such regulatory changes, and provides overviews of the main areas of change.

Regulatory Change for OTC Derivatives

Introduction

o Required Regulatory Changes

o Background to the Changes

o The European Commission: Press Release

o Dodd-Frank Wall Street Reform: Summary

Trading on Exchanges or Electronic Trading Platforms: Overview

Central Clearing: Overview

Capital Requirements: Overview

Trade Repositories: Overview

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Day 5: Central Clearing & its Impact on Collateral From an operations viewpoint, the greatest impact of the introduction of mandatory central clearing for OTC derivatives relates to the impact on collateral. This section focuses on how central clearing will affect both sell-side and buy-side firms, and how both trade processing and collateral processing will be impacted. Delegates will have an opportunity to prove their understanding of this new area via a trade netting exercise.

Central Clearing & its Impact on Collateral

Central Clearing Primary Concepts

o Trade Netting

o Capital Benefits

Central Counterparty Membership Structure

o Central Clearing for Clearing Members

o Central Clearing for Non-Members

Multiple Central Counterparty Implications

o Interoperability

o Netting & Capital Implications

Risk Management within Central Counterparties

o Collateral Requirements

o Eligible Collateral

o Reuse of Bond Collateral

Operational Implications of Central Clearing

Communicating New Trades to Central Counterparties

Cleared versus Uncleared Trades

Legacy Trades

o Backloading

o Netting & Capital Benefits

Legal Documentation

Central Counterparty Supervision

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Day 5: Central Clearing & Collateral Transformation It is anticipated that many buy-side firms will not possess assets that are eligible from a

central clearing perspective. This situation provides sell-side firms with an opportunity

to extend their existing services to their clients through execution of repo and/or

securities lending trades, in order to transform existing assets into central clearing

eligible assets.

This section focuses on how such trades may be executed.

Central Clearing & Collateral Transformation

Definition & Purpose

Collateral Transformation Methods

o Trade with a Clearing Member

o Trade with a Third Party

o Trade with a Custodian or Prime Broker

Operational Implications of Collateral Transformation

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Day 5: Exam Revision This is a ‘free’ session where each delegate can choose exactly how they wish to use the time. The instructor will be available for questions and answers for the entire period. Where there are a number of delegates expressing interest in re-visiting particular topics, the instructor will organise timed sessions where individual delegates may choose to attend (e.g. ‘Interest on Bank Accounts’ session will be run 14:30 – 14:45, and ‘Accrued Interest Calculation’ will be run 14:45 – 15:00). This is designed to make the most efficient use of the delegates’ available time.

Day 6: Exam The exam contains 75 multiple-choice questions, to be answered within 3 hours. It will be run under formal exam conditions, with the usual exam rules applying.