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Payment date calendar

Payment date calendar

Many trading firms, especially ones that are not self-clearing, use prime brokerages to maintain accounting books and records on the trading firm’s behalf. Accrual accounting is used: items are recognized when they are earned and expenses recognized when they are incurred.

Because accrued-based accounting is used, in some cases accruals are set up in the the General Ledger to record income or expenses that have been earned but not received.  The two most common are dividends and coupon interest, and what follows is a typical scenario followed by a prime broker to handle these two items. First, a few important dates are defined:

  • Record date: whoever owns the securities on the close of the record date is entitled to the dividend
  • Ex-dividend date: first trading date following the record date; dividends are not due to security holders as of this date. Also known as the ex-date.
  • Trade date: date on which a trade occurs
  • Settle date: date on which a trade is settled – on that date, cash and securities are exchanged.
  • Pay date: date on which a dividend or coupon are paid. For interest, also known as the coupon date.


Dividends are booked using the ex-dividend date as the trade date and pay date as the settle date. The broker’s Dividend Accrual Report shows the trading firm’s dividends posted for common stock in which the dividend transactions are past the ex-date (i.e., trade date) but have not yet reached the pay date (i.e., settle date). This is usually no more than a 3-day gap domestically. Accountants create accrual entries for the General Ledger during month-end closing cycle based upon the Dividend Accrual Report.

Coupon Interest

Coupon interest is booked on the coupon date (trade date = settle date = coupon date). Accrued interest is not booked in the firm’s transaction database except upon the purchase or sale of an interest-bearing instrument. Interest accrued between the time of a bond purchase and the next coupon date is not recognized in the transaction database until realized on the coupon date (or upon closing of the bond position), but must be accrued monthly in the General Ledger. Therefore, the accountants run an Interest Accrual Report at month-end that shows the accrued interest earned within the month. They create accrual entries for the General Ledger during month-end closing cycle based upon the Interest Accrual Report.

Because the cash from the coupon payment is paid on the coupon date, the coupon’s effect on the trading firm’s cash balances on that date are available for use by cash managers.

Firms usually also receive a Consolidated Accrual Report that reports all accruals for the month, not just dividend and interest.  These include income and expense entries reflected in the company’s receivables and payables.

There are two main motivations for hedge funds to hire a prime broker:

1)     Financing – margin, securities lending, repurchase agreements

2)     Administration – trade support, clearing and settlement, P&L reporting, cash management, procedure documentation

While all hedge funds require financing, some perform their own clearing operations, while others hire a prime broker to perform administrative tasks. In today’s blog, we’ll discuss the three main administrative reports that prime brokers provide to their clients who are not self-clearing.  Typically, the accounting department of the investment fund will reconcile the information on these reports to its own internal data, and take steps to resolve any discrepancies.

Note that although the reports are generated monthly for accounting purposes, they are available daily and even in real-time to support trading decisions and cash management activities.  Also, the term “report” is really a throwback to when access to this kind of information existed only as a computer printout.  In today’s world brokers provide this data online and through decision support systems. Snippets (small subsets of information) are often available as text messages.

Reports can be generated on a trade date or settlement date basis. Trade date reports show positions and P&L based on when trades executed.  Settlement date reports take into account subsequent settlement activity, including trade failures, loans/borrows, and repos.

The three vital reports are:

1)     The Trade Date Position Report – reports the open positions for each account within a particular fund or business unit. Open positions can be long or short. The report usually tracks cost and market value (in both local currency and dollars), and calculates both unrealized and translation gains/losses.  The market value for each security is usually arbitrated using price feeds from several sources.  The difference between the cost and the market value of security’s open position is recorded as unrealized gains/losses and translation gain/losses in the financial statements. This price-update process is referred to as mark-to-market and is a required accounting procedure for companies whose primary business is trading securities. The Position Report gives traders vital information regarding risk exposure.  In some hedging strategies, real-time positions and market values are used to maintain an arbitraged deal correctly.  For example, in delta hedging, traders maintain an offset ratio of options to their underlying stocks.  Price movements trigger hedge adjustments, and the ability to extract a profit from a delta hedge position requires that traders have access to very timely information, such as that provided from the real-time version of the Position Report

2)     The Trade Date Realized Report - reports all realized gains/losses that have occurred during the selected time interval.  Realized gains/losses result from the closing of a position, as opposed to unrealized gains/losses which result from the mark-to-market of an open position.  Most systems calculate realized gains/losses on a first-in-first-out basis. Traders keep close tabs on the Realized Report, as it is an indication of the success or failure of a trading strategy – a prime determinant of trader compensation. Every trader has a vested interest in verifying the information in the Realized Report, especially if a clerical error understates a trader’s realized P&L.

3)     The Cash Activity Report reports opening and closing cash balances for each trading currency by account and all the corresponding transaction entries that affect cash during the time period for which the report is run.  This information is vital for the personnel who manage the trading firm’s cash. Cash managers are responsible for the optimal deployment of cash to minimize financial expense, maximize interest income, ensure adequate balances for upcoming expenditures, satisfy collateral requirements, and to make sure every last dollar (or euro or yen) is being put to good use.

Of course prime brokers can and do supply their clients with dozens of different reports, feeds, and screens.  But the three reports we’ve described here form the information foundation that non-self-clearing hedge funds and other trading firms rely on from their prime brokers.

Prime brokers offer a variety of services to investors, from providing credit to clearing trades. One important service offered is known as Securities Lending. In Part One of this article, we’ll look at the contractual and collateral rules pertaining to Securities Lending.

As an investor or hedge fund, you may wish to borrow shares for a variety of reasons, such as shorting the stock or hedging a long position. An executed Securities Lending Agreement is the documentation required before shares are loaned. Continue reading “Securties Lending, Part One” »