Funding process

Summary
Detail
See also

Summary

The funding process, run by Middle Office, pays or receives interest on all cash accumulated in a book so that the firm's net position in every traded currency is flat overnight — a residual short position would leave the firm unable to meet settlement obligations. Eligible books (flagged Is Funding Book) net their balances, convert everything to a single currency, and fund the aggregate at the internal money-market desk, before returning the funded cash back to the originating books. The informal name for the settlement-date convention this runs against — Tom/Next — is often used loosely as shorthand for the whole process, but is strictly just a time reference; this note uses funding process*/*funding run throughout.

Detail

Why it's needed

Short positions are funded via overnight borrowing (a repo/deposit taken at the current overnight rate).
Long positions are deposited to accrue overnight interest.
Long positions in a currency whose implied USD overnight swap rate is negative are deliberately excluded — holding the currency outright beats lending it at a negative rate.
Non-USD balances across books are first converted into USD so the desk can place one aggregate deposit/borrowing rather than many small ones per currency per book.

Settlement-date terminology

O/N (Overnight) — today to tomorrow.
Tom/Next (T/N) — tomorrow to the day after, normally the FX spot date; sits between O/N and S/N on the short end of the curve.
S/N (Spot/Next) — spot to the next working day.

A spot position held at end of day is, by default, rolled forward to a new value date on a T/N basis, subject to a swap credit/charge based on the LIBOR-equivalent of the two currencies — which is why "Tom/Next" gets used loosely for the whole roll/funding process, even though it is technically just the date reference. Not to be confused with collateral/repo funding, an unrelated concept despite the similar vocabulary.

Mechanics: worked example

A "cable" book (GBP/USD), long GBP and short USD:

Step 1: NET OUT PER-BOOK BALANCES
  Book A (long GBP)  ──┐
  Book B (short USD) ──┤──► equal-and-opposite deals booked in each
                        │    originating book, netting them to zero
                        └──► mirror deals created in the FUNDING BOOK

Step 2: CONVERT EVERYTHING TO ONE CURRENCY
  Funding Book: GBP balance ──► FX deal vs INTERNAL FX DESK ──► USD balance

Step 3: FUND THE NET USD BALANCE
  Funding Book (net USD) ──► Repo vs MM (MONEY MARKET) DESK
                              at the current overnight rate

Step 4: RETURN CASH TO ORIGINATING BOOKS
  Reverse steps 1-2 to assign the funded/deposited cash back to each
  originating book.

Both the FX conversion and the repo are dealt against internal counterparties (the Internal FX Desk and the Money Market Desk) — no external counterparty risk is taken on to run this process.

Inputs to a funding run

All deals with value date = tomorrow.
Forward and spot deals already realised in the past.
"Inferred" loans (repos taken) and deposits (repos given).
Premiums/rebates paid or received.
Residual cash from previous cash-flow activity.
Cash held for specific purposes such as brokerage, net of realised brokerage.
Funding adjustments — manual positive/negative entries made by Ops to strip out unwanted balances (e.g. cash actually held outside the bank) before the run computes what needs funding.

Book eligibility

A book participates in a funding run only if flagged Is Funding Book (see Book classification). Funding Books are also permission-scoped by book purpose: a Funding Book should only ever contain funding trades — the same "purpose constrains allowed deal types" mechanism used for Wash books. An operator chooses which currency pairs and books participate in a given run; funding is not necessarily run identically across the whole firm in one pass.

Workflow

The funding screen supports selecting the rate to use, viewing near/far dates, choosing participating currency pairs/books, previewing all generated transactions before booking, and automating the run end to end subject to an authorisation step. Traders manually supply and approve FX/depo rates when there is no observable market liquidity to price against, backed by a tolerance check against outliers. As with other system runs, users expect a dry-run mode: generate the trades without booking them, review the risk/P&L impact, then commit — and the commit must fail with a stale-data error if underlying deals or rates moved since the dry run.

Audit, governance, and P&L treatment

All deals from one funding run must be linked together, and the run must be re-runnable/cancellable as a unit.
Funding runs require sign-off, alongside brokerage payments and spot sweep runs.
A funding trade is a canonical system-generated trade — booked against an internal counterparty, governed by rule-driven auto-authorisation rather than manual per-deal sign-off, and — like wash/back-to-back trades — used to move risk between books.
The P&L generated is a Funding Roll: the P&L from new funding tickets in the book from one day to the next, ranked directly behind Book Moves in trade-activity priority; a related "Funding Allocation" bucket sits under Time/Theta attribution.
A Funding Run is a System Event (alongside Profit Remittance and Brokerage Payout) — undoable/redoable as a whole; the "do" has real P&L impact, the "undo" must be P&L-neutral.
The resulting ledger entry is balance-sheet-only: the debit/credit pair nets to zero P&L impact, consistent with funding being a cash-repositioning exercise rather than a P&L-generating trade.
Cash-balance reports must include funding and system books.