Asset management firms have, for the past few decades, generally agreed that “trade date” (t/d) accounting is preferred. This practice has been so common that custodians regularly provide trade date reports (where they used to only do settlement date (s/d)) and even brokerage statements are often reported in a trade date manner. While managers (and their clients) are concerned about settlement, it’s understood to be in the hands of the “back office” folks, and will only become an issue if there are problems.

If a security is sold, resulting in proceeds of $100,000, the portfolio managers want to know this so they can, that day or in a day or two, invest that money; however, if it’s held in a “limbo state,” awaiting settlement, then they may not be aware or recall.

Being consistent

A client sent us a note recently regarding an office that recognized the security part of trades on trade date, but the cash movement on settlement date. For example, if 10,000 shares of a security is sold on December 10 for €125,000, the security’s position on their system is reduced by this amount; however, the cash that results won’t appear until s/d. Or, if they decide to buy 25,000 shares of a security costing $250,000, the security will appear on t/d, but the cash won’t be reduced until settlement date.

This is simply incorrect; it will result in return errors, especially if t/d and s/d span a month-end. I suggest this needs to be corrected on both a going-forward and historic basis.

Is GIPS(R) at fault?

You may recall that the Global Investment Performance Standards defines trade date as T (the day of the trade), T+1, T+2, or T+3. And so, T+3 can be considered trade date, so perhaps someone is suggesting that both the cash movement and trading are being done on trade date. While I can see the logic of this argument, the expectation is that they are the same day. If this isn’t the case, errors will result.

Trading ahead

Many firms engage in trading ahead of cash arriving. For example, if a client tells them they are wiring €1 million on Friday, the portfolio manager may trade on Tuesday or Wednesday, knowing the cash will be available on Friday for settlement. While controls and formal agreements should be in place to allow this to happen, that is a separate issue from this discussion.

I recommend that the firm create a “pseudo cash” account (or “anticipated cash,” or “cash due,” etc.) for the amount coming in; the trades that occur should go against this amount. Thus, a simulated external cash flow occurs on the date trading commences. When the cash actually comes in, it can be treated as a cash flow, netting against the outflow from this secondary cash account.
 
Policies & procedures

Firms should probably have policies regarding cash flow treatment if it is anything but “standard” trade/date movement (and, of course, be correct!).

Something rather simple can, at times, be complex. Hopefully this is helpful. If you have any thoughts, please share them; thanks!