The Trade Lifecycle: Behind the Scenes of the Trading Process

3

Asset Classes

What do we mean by asset classes?

A trade can be executed with a huge variety of underlying assets. It is helpful and usual to group assets into classes. Traders are normally organised into desks, each desk trading the same class of assets. Processes that flow from these trades are also divided by their asset class.

Large parts of the trade lifecycle are generic: trades are executed, booked, confirmed and settled. But the implication of these processes may vary from one class of assets to another. Here we discuss some common asset classes, their particular features and how they affect the trade processes.

3.1 INTEREST RATES

The asset class of interest rates is usually taken to include deposits, swaps and futures in one trading currency.

3.1.1 Deposit

A deposit (or loan) is a simple instrument. One counterparty gives an amount of currency to another counterparty, expecting its return on a future date. At agreed regular intervals, interest will be paid by the receiver to the depositor.

A deposit can be unsecured or secured. When secured, the receiver has to provide some collateral to the depositor and in the event of default, the collateral will be forfeited.

The market for very short-term loans and deposits is known as the money market. Here money can be borrowed overnight, for a few days or for a few months.

A very secure form of short-term lending is known as the repo market (repo is short for repurchase). Here the borrower sells a highly secure bond such ...