A Repurchase agreement (also known as a repo or Sale and Repurchase Agreement) allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to sell immediately a security to a lender and also agrees to buy the same security from the lender at a fixed price at some later date. A repo is equivalent to a cash transaction combined with a forward contract. The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is the interest on the loan while the settlement date of the forward contract is the maturity date of the loan.
A repo is economically similar to a secured loan, with the buyer (effectively the lender or investor) receiving securities as collateral to protect against default of the seller (effectively the borrower). Almost any security may be employed in a repo, though practically speaking highly liquid securities are preferred because they are more easily disposed of in the event of a default and, more importantly, they can be easily secured in the open market where the buyer has created a short position in the repo security through a reverse repo and market sale; by the same token, illiquid securities are discouraged. Treasury or Government bills, corporate and Treasury/Government bonds, and stocks may all be used as “collateral” in a repo transaction. Unlike a secured loan, however, legal title to the securities clearly passes from the seller to the buyer. Coupons (installment payments that are payable to the owner of the securities) which are paid while the repo buyer owns the securities are, in fact, usually passed directly onto the repo seller. This might seem counterintuitive, as the ownership of the collateral technically rests with the buyer during the repo agreement. It is possible to instead pass on the coupon by altering the cash paid at the end of the agreement, though this is more typical of Sell/Buy Backs.
Although the underlying nature of the transaction is that of a loan, the terminology differs from that used when talking of loans because the seller does actually repurchase the legal ownership of the securities from the buyer at the end of the agreement. So, although the actual effect of the whole transaction is identical to a cash loan, in using the “repurchase” terminology, the emphasis is placed upon the current legal ownership of the collateral securities by the respective parties.
Below is a simple workflow that explains the way repos are structured.
Release Management for Testers
The release management life cycle is an important work-flow which every testers needs to understand for an efficient and an effective environment setup.
Test-bed/Test environment is defined as the workspace in which the AUT is deployed for testing. Below are a set of steps that need to be followed sequentially to make the test environment fit for testing.
i. Test environment refresh (Refresh from Production or other mirrors) – Typically this refresh can be either incremental or complete. This would result in erasing the current data in the test environment and populating the same with latest production code. In case of refresh all test data in the test environment would be erased.
ii. Static Data setup – All static data in the test environment can either be setup manually or the environment can be refreshed only for static data flash. An automatic static data refresh would copy all static data from production tables to the test environment.
NOTE: In certain cases, both environment refresh and static data setup can be performed with a single refresh request.
iii. Test data setup – All the test data that needs to be either created or pumped into the test environment from production needs to performed before a new build is deployed into the test environment. Usually, test data setup activity is performed after a complete refresh.
iv. Build Request – The build and configuration team would be responsible for creating the test build.
v. Build Release – Once the build is ready, a separate request needs to be placed for the build to be deployed into the test environment.
vi. Request for any external interfaces – If in case there are any external interface requirement, this needs to be raised to the environment support team would be able to link these interfaces with the test environment.
Once the build is deployed, sanity checks are performed to check the fitness of the build. Depending on the build acceptance criteria, the build is passed for testing.
When ever a new build is released, the release management team would be involved in preparing the release notes which would be the basis for the tester to understand what modules are present in the build that would be tested. These release notes are extremely helpful in case of iterative development models in which several iterations of the application is deployed over a period of time.
A Software Test Life Cycle is defined as a sequential and heirachial strategy for verification and validation of the application under test.
Testing is considered to be the most important part of software quality. There are certain principles that needs to be adopted in case testing the application. The principles of software testing as below:
- Testing shows the presence of defects – There is no way that one can detect issues in the application without actually testing the application. Testing can be either static or Dynamic depending on the phase in STLC.
- Early testing – Earlier we start testing the lesser it costs to fix the defects. Defects that are found in the latter stages are much difficult to fix rather than the ones which are found in the earlier phase.
- Testing is context dependent
- Absense of error fallacy – Testing the application completely doesn’t ensure that the application is delivered defect free.
- Defect clustering – There is a possibility that while testing a particular module heavly, more number of defects are found in that module.
- Pesticide Paradox – Repeated testing with the same set of test cases evetually renders as the no more defects can be found in that particular module in the application. Repeated modification and tweaks to the test cases/scenarios are required to enhance the testing scope and test accuracy.
Below is a sample Software Test Life Cycle model that we usually use in our internal projects.
- Requirements analysis: Testing should begin in the requirements phase of the software development life cycle. During the design phase, testers work with developers in determining what aspects of a design are testable and with what parameters those tests work.
- Test planning: Set of activities that involve preparation of Test strategy, test plan and testbed setup together come under Test planning.
- Test development: Test procedures, test scenarios, test cases, test datasets, test scripts to use in testing software.
- Test execution: Testers execute the software based on the plans and test documents then report any errors found to the development team.
- Test reporting: Once testing is completed, testers generate metrics and make final reports on their test effort and whether or not the software tested is ready for release.
- Test result analysis: Or Defect Analysis, is done by the development team usually along with the client, in order to decide what defects should be treated, fixed, rejected (i.e. found software working properly) or deferred to be dealt with later.
- Defect Retesting: Once a defect has been dealt with by the development team, it is retested by the testing team. AKA Resolution testing.
- Regression testing: It is common to have a small test program built of a subset of tests, for each integration of new, modified, or fixed software, in order to ensure that the latest delivery has not ruined anything, and that the software product as a whole is still working correctly.
- Test Closure: Once the test meets the exit criteria, the activities such as capturing the key outputs, lessons learned, results, logs, documents related to the project are archived and used as a reference for future projects.
- Post Implementation Support: Once the application/patch does live, testers and support BA are involved in providing post implementation support that involves sanity checks on the live application.
- Warranty Support: Once the build goes live, certain project teams have a warranty phase where in any reportable event due to the current build would need to fixed, tested and pushed into live once again as a warranty fix.
Different Software Development models have different features and properties. Selection of the software development model depends on the nature of project and client. Here, I will try to give a comparison of various software development models with three parameters:
1. Contribution to Quality
2. Risks Associated
3. Context of adoption
Model Name: Waterfall Model
Contribution to Quality: Phase End Checks
Risks Associated: Expects a task to be well done in the first go
Context of adoption: When the requirements are structured and competence is high
Model Name: Software Development Lie Cycle Model (ETVX Model)
Contribution to Quality: Entry task verification exit definition and quality control through feedback.
Risks Associated: Final Product available only after the complete cycle
Context of adoption: When the requirements are quite structured, but scale is large. One may need to go back for rework if required.
Model Name: Prototype Model
Contribution to Quality: 1. Seeing is believing. 2. Go iterative and involve customer. 3. Produce working models to give faster delivery and have concrete feedback.
Risks Associated: The scrap may go uncontrollable
Sponsored Links: Context of adoption: When needs to try out things before making a commitment to deliver.
Model Name: Spiral Model
Contribution to Quality: 1. Avoid scrap as well as rework – do right the first time. 2. Analyze risks before undertaking the next enhancement.
Risks Associated: Inadequate experience and subjective method of risk management
Context of adoption: When the scale is large and planned; passed development would give confidence to move ahead or stop as suited.
Model Name: V-Model
Contribution to Quality: Plan for testing of artifacts much before their actual completion
Risks Associated: Testing techniques applied may remain subjective
Context of adoption: It is a philosophy that can be applied with any other models you choose.
Model Name: Unified Process Model
Contribution to Quality: 1. Iterative evolutionary use case centric development. 2. Defines workflows and milestones for better project management.
Risks Associated: Identification of phases needs experience.
Context of adoption: When the scale of project is large.
Model Name: Agile Models
Contribution to Quality: Anytime delivery through flexible design, limited scope and quick reviews.
Risks Associated: Flexible design techniques not well established. The designers lack an understanding of business need for agility.
Context of adoption: When business needs are dynamic and need to be fulfilled immediately.
Testing the software system or software application as a whole is referred to as System Testing of the software. System testing of the application is done on complete application software to evaluate software’s overall compliance with the business / functional / end-user requirements. The system testing comes under black box software testing. So, the knowledge of internal design or structure or code is not required for this type of software testing.
In system testing a software test professional aims to detect defects or bugs both within the interfaces and also within the software as a whole. However, the during integration testing of the application or software, the software test professional aims to detect the bugs / defects between the individual units that are integrated together.
During system testing, the focus is on the software design, behavior and even the believed expectations of the customer. So, we can also refer the system testing phase of software testing as investigatory testing phase of the software development life cycle.
At what stage of SDLC the System Testing comes into picture:
After the integration of all components of the software being developed, the whole software system is rigorously tested to ensure that it meets the specified business, functional & non-functional requirements. System Testing is build on the unit testing and integration testing levels. Generally, a separate and dedicated team is responsible for system testing. And, system testing is performed on stagging server.
Why system testing is required:
- It is the first level of software testing where the software / application is tested as a whole.
- It is done to verify and validate the technical, business, functional and non-functional requirements of the software. It also includes the verification & validation of software application architecture.
- System testing is done on stagging environment that closely resembles the production environment where the final software will be deployed.
Entry Criteria for System Testing:
- Unit Testing must be completed
- Integration Testing must be completed
- Complete software system should be developed
- A software testing environment that closely resembling the production environment must be available (stagging environment).
System Testing in seven steps:
- Creation of System Test Plan
- Creation of system test cases
- Selection / creation of test data for system testing
- Software Test Automation of execution of automated test cases (if required)
- Execution of test cases
- Bug fixing and regression testing
- Repeat the software test cycle (if required on multiple environments)
Contents of a system test plan: The contents of a software system test plan may vary from organization to organization or project to project. It depends how we have created the software test strategy, project plan and master test plan of the project. However, the basic contents of a software system test plan should be:
- Scope
- Goals & Objective
- Area of focus (Critical areas)
- Deliverables
- System testing strategy
- Schedule
- Entry and exit criteria
- Suspension & resumption criteria for software testing
- Test Environment
- Assumptions
- Staffing and Training Plan
- Roles and Responsibilities
- Glossary
How to write system test cases: The system test cases are written in a similar way as we write functional test cases. However, while creating system test cases following two points needs to be kept in mind:
- System test cases must cover the use cases and scenarios
- They must validate the all types of requirements – technical, UI, functional, non-functional, performance etc.
As per Wikipedia, there are total of 24 types of testings that needs to be considered during system testing. These are:
GUI software testing, Usability testing, Performance testing, Compatibility testing, Error handling testing, Load testing, Volume testing, Stress testing, User help testing, Security testing, Scalability testing, Capacity testing, Sanity testing, Smoke testing, Exploratory testing, Ad hoc testing, Regression testing, Reliability testing, Recovery testing, Installation testing, Idem potency testing, Maintenance testing, Recovery testing and failover testing, Accessibility testing
The format of system test cases contains:
- Test Case ID – a unique number
- Test Suite Name
- Tester – name of tester who execute of write test cases
- Requirement – Requirement Id or brief description of the functionality / requirement
- How to Test – Steps to follow for execution of the test case
- Test Data – Input Data
- Expected Result
- Actual Result
- Pass / Fail
- Test Iteration
SDLC is a systematic and orderly approach to solving problems related to software systems or in other words, we can say it is a structure imposed on the development of a software product.
Domain Analysis: This phase is very important. The more knowledgeable you are about the domain, less the work required. Another objective of this phase is to make the analysts who will later try to elicit and gather the requirements from the area experts or professionals. So, this phase is an important prelude to extracting and gathering the requirements.
Requirement Analysis: The most important task in creating a software product is extracting the requirements. Customers typically know what they want, but not what software should do, while incomplete, ambiguous or contradictory requirements are recognized by skilled and experienced software engineers.
Scope Analysis: Once the requirements are gathered from the client, an analysis of the scope of the development should be determined and clearly stated. This is often called a scope document.
Specification: It is the task of precisely describing the software to be written, possibly in a rigorous way. In practice, most successful specifications are written to understand and fine-tune applications that were already well-developed, although safety-critical software systems are often carefully specified prior to application development. Specifications are most important for external interfaces that must remain stable. A good way to determine whether the specifications are sufficiently precise is to have a third party review the documents making sure that the requirements are logically sound.
Software Architecture/Design: Architecture is concerned with making sure the software system will meet the requirements of the product, as well as ensuring that future requirements can be addressed. The architecture step also addresses interfaces between the software system and other software products, as well as the underlying hardware or the host operating system.
Coding: The design must be translated into a machine-readable form. The code generation step performs this task. If the design is performed in a detailed manner, code generation can be accomplished without much complication. Programming tools like compilers, interpreters etc… are used to generate the code. Different high level programming languages like C, C++, Pascal, Java are used for coding. With respect to the type of application, the right programming language is chosen.
Testing: Once the code is generated, the application / software testing begins. Different testing methodologies are available to unravel the bugs that were committed during the previous phases. Different testing tools and methodologies are already available. Some companies build their own testing tools that are tailor made for their own development operations.
Implementation: After the code is appropriately tested and approved, it is made available for business use i.e. moved into production environment.
Documentation: An important task is documenting the internal design of software for the purpose of future maintenance and enhancement.
Software Training and Support: As a part of the deployment phase, it is very important to have training classes for the software user. Users will have lots of questions and software problems which leads to the next phase of software.
Maintenance: Maintaining and enhancing software to cope with newly discovered problems or new requirements can take far more time than the initial development of the software.
Below is a sample checklist for Release Readiness Review and Pre Delivery Audit. It is useful both for Project Managers and Software Quality Analysts.
- Is delivery going against approved Contract/Statement of work/work order? If not, is the mail for approval from senior management available for the delivery?
- Has the requirements document / FSD validated and approved by client?
- Are all the requirements implemented as per approved requirement document or specification document or as agreed with the client? If not, is it documented in the release notes / delivery note etc and approval taken from customer / delivery head?
- Are all Non-technical / non-functional requirements satisfied / completed?
- Is the build verification done before each Testing?
- Are all test cases updated to ensure complete test coverage?
- Are all cycles of testing completed and defects closed ? If any defcet is open, is it documented in the release notes / delivery note etc and approval taken from customer / delivery head.
- Are all review defects closed?
- Is the test Coverage Goal met as mentioned in test plan?
- Is the traceability from requirements to source code to test cases to test results documented and available for review?
- Is the goal for System testing / functional testing or any other type of testing is met?
- Are all the test cases for acceptance testing identified and documented?
- Are all audits done for the all items as identified in the software quality assurance plan?
- Are the findings of FCA / PCA / other audits closed (if any) ?
- Has the test cases executed on target environment (or similar of target environment) ?
- Is acceptance criteria for system validation available?
- Does end product / application meets the acceptance criteria during system testing ?
- Is the code modification history updated and code files are labled properly in the configuration tool?
- Are all the work products, deliverables and code consistent?
- Are the CIs of the entire release package identified?
- Is each CI in the release package CI tested / reviewed / approved?
- Are all findings of testing / review of CIs closed?
- Is the FTP credentials or CD key etc documented? Are these communicated to client / customer?
- Is release media and its access verified before sending the information to client?
- Are the following documents / deliverables / work products ready: FSD, ADS, DDS, Test Plan, Test Case, Release Note, Installable Product, Source Code, Test Programs, Drivers, Read me File, License File, Known Problems List, Installation Procedure, Install Scripts, User Manual, Programmer’s Manual, Administrator Manual, Test Reports, Training Material or any other deliverable required by client?
- Is the delivery made from the static folder of VSS?
Apart from above points, the status of below points can also be checked:
- Baselining of deliverables in configuration management tool
- End of project backup and restoration of the backup
- Readiness of maintenance / support plan
- Is the problem reporting procedure documented and communicated to client?
- Are the contact persons documented and communicated to client??
- Is the post release defect reporting template ready?
- Whether request has been made to IT for making the project repository under VSS read only?
The failure mode and effects analysis and a variant including criticality analysis (FMECA) are iterative activities, intended to analyze the effects and criticality of failure modes within a system. The application of these analyses to software is sometimes termed SFMEA and SFMECA where S stands fot software.
Testers must be able to contribute to the creation of the FMEA document. This includes understanding the purpose and application of these documents as well as being able to apply their knowledge to help determine risk factors.
Areas of application:
FMEA should be applied:
1. where the criticality of the software or system under consideration must be analyzed to reduce the risk of failure.
2. Where mandatory or regulatory requirements apply
3. To remove defects at an early stage
4. to define special test considerations, operational constaints, design decisions for safety critical systems
Implementation steps:
FMEA should be scheduled as soon as preliminary information is available at a high level and extended to lower levels as more details become available.
For each critical function, module or component, iteratively:
1. Select a function and determine its possible failure modes, i.e. how the function can fail.
2. Define the possible causes for those failures, their effects and design mechanisms for reduction or mitigation of failures.
Befenits and Costs:
FMEA provides the following advantages:
1. Expected system failures caused by software failures or usage errors can be revealed.
2. Systematic use can contribute to overall system analysis
3. Results can be used for design decisions and justifications
4. Results may be used to focus testing to specific areas of the software.
Thanks,
Arun
www.focustesting.com
Acceptance Period
In case of a tender offer or miscelanous offer, the accetance period is the period in which shareholder can accept the offer. They would usually do so by sending an instruction to their broker or custodian.
Acquisition
When one company takes over another company.
Actual settlement date
The actual settlement date is the date at which securities and cash factually settle in the account of the counterparties in a trade. Depending on which market, a trade settles 2-, 3- or even more days after the trade date. Please also refer to Trade date, Contractual settlement date below in this list.
American style Options
Option contract that is exercisable at any point in time during the exercise period. A European style option is only exercisable at the expiry date.
Announcement
The date at which a corporate actions event is officially announced. The announcement can either be made by the issuer or by the lead agent in the market.
At the money
One of the three forms of moneyness of a derivative (in-the-money, at-the-money and out-of-the-money). When “at-the-money”, the price of the underlying security is exactly the same as the strike price of the derivative.
Autocompensation
In some markets the Central Securities Depository (CSD) will autocompensate for trades that trade and settle over the exdates (resulting in claims). In effect this means that for every trade that settles over the exdate, it will consequently debit the seller the entitlement that was attached to the shares and credit the buyer with it. The attached entitlement could for example be a right in the case of a Rights Issue or a cash proceed in the case of a Capital Return event. The advantage of this is that both the seller and the buyer only have to reflect what the CSD has done (for which they will receive SWIFT message confirmation) in their own books rather than having to contact one another to claim from eachother.
Basket
A group of securities that can be traded, managed and tracked as one entity. Also derivatives can be issued relating to a basket of underlying securities. One of the aims of creating a basket is to spread risk.
Bearer shares
Securities can either have “bearer” or “registered” form. Let’s imagine that in the past, when securities were in paper form, a shareholder would go to his bank and take the paper with him to collect for example a dividend. As proof that the dividend was paid out, the bankemployee would tear off one of the many coupons from the share. The name of the shareholder was not registered anywhere by the issuer of the security. The bank could go to the issuer and exchange the coupon for the dividend payment.
Bookbuilding
Sometimes, for example in a rights issue event. the price at which shareholders can subscribe to new shares is being established by calculating the weighted average of shareprices and trading volumes over a certain period of time. This method of calculation is called bookbuilding.
Call Option
A contract giving the investor (the buyer of the call option) the right, but not the obligation, to buy shares at a fixed price (the strike price) within a certain time frame (up to the expiry date of the contract).
Capital Gains Tax
The tax that needs to be paid over profits that were made from holding securities – ie a percentage has to be paid over the difference between the price at which a security was sold and the price at which is was bought. Several Corporate Actions events result in profits over which capital gains tax needs to be paid. Please refer to our TAX section for more info.
Claims
Due to the Settelment Cycle, trades can be traded “over ex”. This means that the security was purchased with the entitlement, but that the entitlement will get distributed to the seller, because he will still have the shares in his account on the record date. The buyer has to claim the entitlement from the seller. In corporate actions claims result in two types of actions: Compensations and Transformations.
Compensations
Compensation is the amount of money or amount or additional securities a purchaser receives from the seller if he had bought the shares before the exdate of the event and the shares settled in his account after the exdate.
So for example: Person A buys 100 shares from Person B before the exdate of a cash dividend. The shares and the price he pays for them however, settle after the exdate. This means that the seller of the shares will receive the cash proceeds as a result of the cash dividend, while the buyer is entitled to them. The buyer has to CLAIM the cash proceeds from the seller.
Cum
Cum is Latin for “with”. When one is trading shares “cum” it means that one is trading the shares “with” the entitlements to a certain corporate actions event. When one is trading shares “ex” it means that one is trading the shares “without”the entitlements to a certain corporate actions event.
Convertible Bond
A bond that may be converted into a fixed number of shares (sometimes at a fixed price). There can be certain timeframes in which conversion is not permitted during a year. Sometimes conversion is only possible at a certain date(s) during the year. If the Bond has not been converted into shares at maturity, it will be redeemed for cash just like any normal bond. Convertible bonds pay interest just like normal bonds.
Coupon
A numbered part of a security on which interest is being paid out.
Data Vendor
A company the sells information about corporate actions events to the financial services industry.
Default
Default refers to the course of action that will be taken in case no instruction is received from the shareholder as to what decision to make.
Dept
The sum of all liabilities of a company
Distribution
The delivery of the cash and stock proceeds as a result of a corporate actions event.
Dividend
The part of the nett profit of a company that will be paid out to its shareholders
DRIP
Short for Dividend Re-Investment Plan
Election
In voluntary events and in mandatory events the holders of the security are being given a choice and consequently they have send an instruction with their decision.
Emission
Issuance of new (primary emission) or already existing (secundary emission) shares, bonds or other securities.
Equity
The sum of all possessions of a company
Excercise
Making use of your right (for example to buy shares at a given price)
Exdate
the date at which a stock will trade “cum ex” (without entitlement). So for example in a normal cash dividend, if the exdate is 25.11.2008 then the stock will trade without the right to the cash dividend from the 25.11.2008 onwards. Cum (latin for with) and Ex (latin for without).
Expiry date / Expiration date
1) The date at which an option or a warrant expires, and therefore cannot be exercised any longer.
2) The date at which a Tender Offer expires, ie the day up until shareholders can tender their shares to the offer.
Fractions
In several corporate actions events, ratios are involved that will lead to entitlements that are less than one share. For example in a reverse stock split where every 10 shares entitle to receive one new share (ratio = 10:1), sharholders who hold let’s say 9 shares before the reverse split will be entitled to 0.9 shares after the reverse split. Securities are generally not tradeable in amounts less than 0, so the leadagent can chose to round up or down, or cash compensate the shareholders for fractions.
Futures
A future is a contract between a buyer and a seller whereby the buyer agrees to buy a predetermined amount of a product at a predetermined price at a predetermined date in the future. Please note the difference between a future and an option: with a future, there is the obligation to buy/sell, whereas with an option there is the right to buy/sell.
Gearing
When you devide a company’s total debts by it’s total equity you will get a percentage. The higher the percentage, the higher the risk of investing in the company.
Gross
Payments as a result of a corporate actions event can be “gross” or “net”. Gross means payment before tax has been deducted, nett means payment after tax has been deducted.
ICSD
The letters are standing for “International Central Securities Depository”. It is in fact a Central Securities Depository through which securities from other countries can be held. Most well-known ICSD’s are: DTCC, Clearstream, Euroclear and SegaInterSettle.
Income Tax
Tax that needs to be paid over income resulting from holding securities. For example; income tax needs to be paid over a cash dividend.
Interest
The percentage of the nominal of a loan that will be paid to the lender as a reward for his willingness to lend the money to the borrower.
Interim Dividend
A dividend that is paid during the cause of a dividend year. In most cases a final dividend will follow.
In the money
One of the three forms of moneyness of a derivative (in-the-money, at-the-money and out-of-the-money). When “in-the-money”, the price of the underlying security is such, that the derivative will pay out money when exercised.
ISIN
International Seucrities Identification Number. Every security has got their own unique Identification number. The number starts with the letters of the country of its main listing.
Lapsing
Rights in a rights issue event and warrants can lapse if they are not sold or exercised by the owner before the deadline. Lapsing can be either “worthless” or “versus money”. In case rights or warrants lapse worthless, they will just be booked out of the account of the investor free of payment on the day they lapse. In case of for example a rights issue the rights can be bought by interested parties after which they can be booked out of your account versus payment.
Lending
It is possible to lend shares to parties in the market in return for a fee. Often this is done in order to cover for “short positions” on the borrower’s side.
Long position
The oppositite of a short position (see below). The investor expects this stock to rise in value.
Maker – Checker
Maker – checker refers to the concept that everything that is being done needs to be approved by at least one other person. In Corporate Actions this is due to the perceived risk that is attached to actions that are being made.
Mandatory Event
A mandatory Corporate Actions event is an event in which the shareholder has no choice. The event will happen regardless of his approval. (most of the time mandatory event do require shareholder approval at the AGM though).
Market value
The market value of a share is the price at which it is being traded on the stock exchange. There are many methods to establish the value of a share.
Net
Payments as a result of a corporate actions event can be “gross” or “nett”. Gross means payment before tax has been deducted, nett means payment after tax has been deducted.
Nil paid
Securities can be fully paid or nil paid. Securities, like for example nil paid rights, that don’t represent a share in the issuer’s capital are called nil paid. Therefor the holder doesn’t have to pay for them.
Nominal Value
This is the value of a share when it was first issued by the company. The total nominal value of all shares represents the total nominal value of equity on the balance sheet of the company. The nominal value of a share is not the same as the market value.
Notification
An official message in which an event or an entitlement payment is announced or confirmed.
Ordinary Shares
Ordinary shares as opposed to preferred shares carry no fixed dividend obligations. Also, a dividend on ordinary shares can only be paid out after the obligations of the preferred shares have been met by the company (i.e. the dividend has been paid out on them). In case of a bankruptcy of the company, holders of preferred shares will receive payment before holders of ordinary shares will. Ordinary shares carry voting rights, which will entitle the holder to cast his vote on AGM’s and EGM’s – preferred shares usually do not carry voting rights.
Out of the money
One of the three forms of moneyness of a derivative (in-the-money, at-the-money and out-of-the-money). When “out-of-the-money”, the price of the underlying security is such, that the derivative will be worthless when exercised.
Preferred Shares
Preferred shares will have fixed terms which have been negotiated between the investor that holds them and the company that issued them. Terms can include obligations to pay dividends on preferred shares before paying dividend on ordinary shares. In case of a bankruptcy, preferred shares rank higher in priority to receive payments (after bond holders – but before ordinary shares holders). Preferred shares carry no voting rights. Usually preferred shares get converted into ordinary shares after a certain period.
Quorum
The minimum amount of shareholders that need to attend the annual general shareholders meeting (AGM) in order for the the voting points – that were voted in favor for – to become legally binding.
Record date
The date at which your positions will be recorded in order to calculate your entitlements. So for example; if the positions in your account on record date are 100,000 shares and a cash dividend pays EUR 0.25 per share then your entitlement will be calculated as 100,000 x EUR 0.25 = EUR 25,000.
Equity Trade Life Cycle
An equity also known as share, stock or preferential share is defined as an equal portion in a company’s capital that is sold and traded in the capital markets.
In India, BSE (Bombay Stock Exchange) and NSE (National Stock exchange) are two main capital markets where these equities are freshly issued and traded. The performance of any national market is measured by using their corresponding Index.
An index is defined as a barometer of a market. An index measures the performance of top Tier I & Tier II stocks that are qualified and listed in the respective stock exchange. BSE’s performance is measure using the index SENSEX (Sensitive Index) and NSE’s performance is measured using the index NIFTY (National Fifty).
Sensex is a measure of 30 top stocks across each and every sector. Similarly NIFTY is a measure of top 50 that includes various sectorial stocks in NSE.
Stock trade flow:
SWIFT (Society for Worldwide Information for Financial Telecommunication) is an authenticated messaging service between banks and other financial institutions. All settlement instructions are taken care by using these SWIFT messages. These SWIFT messages come under the ISO 15022 standards which govern the format in which SWIFT messages should be sent and received across to different financial institutions. All category 5 messages take care of the below transactions:
1. TIC – Trade Initiation and confirmation
2. S&R – Settlement and Reconciliation
3. CA – Corporate actions
The entities that participate in trade includes the following:
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Client who can either be an Investment manager, Assert Manager or an Assert (or Investment) Management Company (AMC).
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Then Custodian who can either be a broker or a dealer who would be in-charge of executing the order.
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The DP (Depository Participant) who would be responsible for trade settlement.
Traditional Trade Flow
The life cycle of a trade starts with the Client placing an order for the purchase of securities along with the price and other parameters with which the trade should be executed. This business process is known as Trade capture. The Dealer (or broker) also sends in his trade details that contains specifics such as stock details, price of trade, quantity, commission and settlement details.
The client’s trade information and dealer’s trade information is processed and matched. This is business process is known as Trade Matching. Both Trade capture and trade matching happens on the same day (T+0 – Trade Day). All such trades that are captured and matched are said to be successfully matched trades. Once the trade is matched, the dealer and the clients are informed through SWIFT messages that trade was successful.
Then Clearing happens the next (T+1) day. Clearing is defined as a set of business processes that happens between when the order is placed till the actual clearing process happens. The cash gets settled first followed by the securities that gets deposited in the customer’s DEMAT account.
Settlement is a process by which the securities get deposited to the dematerialized (DEMAT) account of the end customer. Settlement happens on T+2th day. Recording or reconciliation process is that process that involves matching of the details that are obtained from a successful trade execution. Reconciliation happens on T+3 days. This is when the trade is considered to be complete. An audit trail based system best explains the entire trade flow process.
CA – Corporate action is defined as set of transations (either financial or non-financial) that are communicated either to the customer or the custodian through SWIFT messages. The most common corporate actions includes the below:
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Informing the customer about the declaration of divident
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Communication of an event
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Claim processing
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Instruction processing
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Reporting
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Reconciling
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Requesting for votes from the customer
- General stock performance
For further and indepth information please mail me at arun.vijayaraghavan@focustesting.com
Thanks,
Arun
Arun Vijayaraghavan is a Senior QA working for one of the world's largest Investment Banks. Arun has extensive experience in Retail Banking, Investment banking and non-life insurance domains.
