Trade Life Cycle

What is the Trade Life Cycle?

All the events a trade goes through from the moment it is created until it is settled and closed.

What system is used to manage the trade life cycle?

The CTRM system – Commodity Trading and Risk Management.

What does “OTC” mean?

Over-the-Counter: a trade done directly between two parties, not on an exchange.

What does “Netting” mean?

Only one party pays the net difference between two amounts, instead of both sides making full payments.

When does a trade officially end?

When the final payment is made, not just when pricing is finalized.

What are the three main reasons firms do commodity trades?

Hedging (reduce price risk)
Speculation (profit from price changes)
Market Making / Client Flow (earn from bid/ask spreads)

What are the main types of commodity trades?

Swaps, futures, options, and physical trades.

What is a Fixed-for-Float commodity swap?

One party pays a fixed price (e.g., 100/BBL), the other pays a floating index price (e.g., December NYMEX average).

What are “Pre-Trade Considerations”?

Internal checks (e.g., credit and market risk limits) performed before trade entry. These are not part of the CTRM system.

What are the two main risk checks before a trade is executed?

Credit Limits – Prevent overexposure to a counterparty.
Market Risk Limits – Ensure trades stay within Value-at-Risk (VaR) thresholds.

Are these checks done in the CTRM?

No, they use internal/external risk control systems.

What tools support pre-trade decisions?

Decision-support systems and CRM tools like Salesforce or Chinsay.

What happens after a trade is entered into the CTRM system?

It goes through a confirmation process (PDF or automated). The Middle Office validates it.

What happens on Day 1 of a swap trade?

Trade is entered in CTRM, confirmation sent to counterparty, and Middle Office verifies details.

What does the Front Office do?

Makes trading decisions
Enters trades into CTRM
Interfaces with clients/brokers

What does the Middle Office do?

Validates trade details
Checks credit and market limits
Conducts daily Mark-to-Market
Ensures internal control compliance

What does the Back Office do?

Manages confirmations
Sends/receives invoices
Tracks payments
Performs reconciliation

What does the Operations/Logistics team do?

Coordinates physical delivery
Manages inspection
Schedules shipping

What happens during a trade’s active period?

Daily Mark-to-Market and risk evaluations.

When is the floating price in a swap known?

After the pricing period ends.

When is the trade free from commodity price risk?

Once the floating side price is locked in.

How does invoicing work in a swap?

Based on the index price (e.g., 101/BBL − 100/BBL) × quantity = net payable.

When does the trade life cycle end?

Typically 5 days after pricing (payment date). For multi-month contracts, after final payment.

Does CTRM track payment receipt?

No. A separate cash reconciliation system is used.

Are broker fees part of the trade life cycle?

Yes – usually paid monthly and factored into total trade cost.

How do futures differ from swaps?

Traded on exchange (not OTC)
No confirmation needed
Requires initial and variation margin
Closed by entering opposite trade or expiry

What happens if a futures contract is physically settled?

A physical trade must be created in CTRM to reflect delivery.

What are the key steps in the trade life cycle of a commodity swap?

1. Pre-Trade Decision – Trader decides to hedge, speculate, or serve a client.

2. Risk Checks – Credit and market risks are reviewed.

3. Execution (OTC) – Trade is agreed directly with the counterparty.

4. Trade Capture – Trade is entered into the CTRM system.

5. Confirmation – Trade details are confirmed and approved.

6. Mark-to-Market – Daily revaluation based on market prices.

7. Price Finalization – Final price is set using an agreed index.

8. Invoicing – Payment amount is calculated and billed.

9. Settlement – Payment is made between parties.

10. Lifecycle Ends – Trade is closed once payment is complete.

What are the key steps in the trade life cycle of a commodity future?

1. Pre-Trade Decision – Trader chooses to hedge or speculate.

2. Risk Checks – Ensure limits are not exceeded.

3. Execution (Exchange) – Trade is placed on a regulated exchange.

4. Trade Capture – Trade is recorded in the CTRM system.

5. Broker Reconciliation – Trades are matched with broker records.

6. Initial Margin – Collateral is posted to open the trade.

7. Daily MTM & Variation Margin – Gains/losses settled daily.

8. Position Management – Trader may close, hold, or roll the position.

9. Settlement – Cash or physical delivery at expiry.

10. Lifecycle Ends – Trade is complete and closed.