Trade links

Table of Contents

1. Summary

Trades rarely stand alone. A close-out answers a live trade, a back-to-back routes a client trade's risk, a fixing belongs to the forward it fixes. A trade link is the typed, directed relation that records this. The type names the reason, and each end plays a role: original and closing trade, exercised and resulting trade, hedged and hedging trade.

A link joins particular trades and holds nothing. A collection of trades that an operation attaches to as a whole, such as a merge, a compression or a funding run, is not a link but a trade group with an identity of its own. A structure is a trade set as well, and it adds a product to the set rather than a run.

The link type decides behaviour through one property: its economic effect. A link with an economic effect is a trade event; it changes the trade and may need a confirmation. A link with no economic effect is an annotation; the system records and reports it, and it changes no term.

This page fixes the vocabulary, describes how links come into being, and states the invariants they must satisfy. The catalogue of types is on Trade link types; the prior art behind the term is at the end of this page.

2. Detail

2.1. What a link is

A link joins two trades and says why. It is directed: the close-out link runs from the original trade to the closing trade, and the misbooking link runs from the correction trade back to the erroneous original. Each end plays a role, and the role is part of the record, not something a reader infers.

A link is typed. The type is the reason: close-out, novation, roll, exercise, fixing. The reason cannot be recovered from the two trades alone — a cancelled trade and a live one are the ends of a close-out, a misbooking and a novation alike — so the system stores the link as data.

A link joins two trades, with one exception: a trade and the cash flows it explains (see Linked cash). Where more than two trades take part in one operation — the trades a funding run generates, the contributors and result of a merge — the operation is a trade group, and each trade references it. Pre-trade objects — orders, quotes, RFQ records — sit outside the trade model, and their links are out of scope here.

2.2. The property that decides behaviour

A link with an economic effect is a trade event. The two linked trades are the before and after of an economic change: the trade changes, a version is cut, and the customer may have to agree again. Close-out, novation, roll, exercise and misbooking correction are trade events.

A link with no economic effect is an annotation. The trades stand on their own; the link records how they came about, why they sit together, or who asked for them to be joined. Fixings, back-to-backs, book moves, hedge marks and user links are annotations.

Groups carry the same property. A merge or a compression is an economic event for every trade it touches; a funding run is not. The catalogue states it for each.

Annotations are not second-class. They carry the audit trail. A risk-routing chain can be traced back to the client trade, and a fixing back to its forward, only because the process records the link even where it could price the new trade without it.

Trade Structures and Deal Composition states the rule as one of its four ground rules for development on structures. It governs every decision about link behaviour: whether to version, whether to confirm, whether to notify downstream.

2.3. How links come into being

Several routes carry every link.

  • At booking. A back-to-back pair is generated with the client-facing trade, so the two sides of the risk route exist together (see Wash books and risk routing). A trade that must change to a book with a different legal entity, branch, regulatory book or accounting classification is closed out and rebooked, and the two trades are linked; a move within those lines amends the trade's booking and creates no link (see Book moves). A correction trade is linked back to the erroneous original by a misbooking correction link (see Trade Versioning).
  • From a lifecycle event. Exercising an option into a new trade links the option to the resulting trade, and a fixing links a non-deliverable forward to its fixing trade. The event that creates the trade creates the link in the same transaction.
  • By hand. The blotter's Link / Unlink actions join trades a user chooses: a hedge forward to the option it hedges, or any two trades under a user-defined link. The linked forms carry the work — Link Amend carries a change from the primary trade to its counterpart, and Link Split breaks a link. See Trade Blotter.

Some operations the blotter offers under the same Link action do not create links. Joining an ECN block to its allocations makes an allocation, Link Net makes a merge, and attaching legs booked separately adds them to a structure. Funding rolls, sweeps and cleardowns generate trades that reference the run that generated them. Each of these is a trade group: its trades reference the group, and the run it belongs to carries who ran it, when and why.

2.4. Invariants

  1. Traceability over convenience. The system records a link even where a process could produce the correct numbers without it. A back-to-back could be valued knowing only its own terms; the link exists because audit must trace it back to the client trade.
  2. Back to origin. Every generated trade keeps a path to what caused it: a link to the trade that caused it, or a reference to the group that generated it. The path survives the operation that created it — a split, a route, a move, a correction.
  3. Created together. Trades a single run generates, such as a back-to-back pair, a close-out and its rebooking, or every trade of a funding roll, are written in one transaction with their links or their group, or not at all. No reader sees half of the run.
  4. Propagation. Where two sides of a link must stay aligned, a change to the primary trade carries to the counterpart. Link Amend is the blotter's form of this rule.
  5. Explicit roles. A link is directed, and its ends are named. The record says which trade is the original and which is the outcome; for a correction, the link runs from the correction trade to the erroneous original.

2.5. Naming and prior art: why "trade links"

The concept is industry-wide and the names differ. The table records what each source we follow calls it.

Concept Name in the source we follow
Generic typed link between trades FpML linkedTrade — a linkId and a linkType, where the type carries the reason
Lifecycle traceability ISDA CDM lineage — each business event ties an after trade state to the before state it replaces
Identifier continuity across a lifecycle event prior UTI — the report of a replacement trade names the identifier it supersedes
Allocation between a block and its children FpML blockTradeId and allocationTradeId, now folded into linkedTrade
A group of trades under one agreement the netting set of the ISDA documentation
Clearing relationships give-up and take-up; the beta and gamma trades of a clearing chain
Order relationships FIX parent and child orders
The user's action in a blotter link and unlink

We chose link over linkage for several reasons. FpML standardises linkedTrade, so the word has a standards precedent. The blotter verbs are already Link and Unlink, so the noun matches our own vocabulary. And in market usage "linkage" more often names settlement netting than the relation between two trades, so reusing it would blur both senses. "Deal" is rejected for the same reason "trade" is preferred throughout: one word per concept.

The material analysed, in full:

  • the FpML 5.12 schema — the LinkedTrade complex type, and PartyTradeIdentifier with linkId, linkType, blockTradeId, allocationTradeId, originatingTradeId and resultingTradeId;
  • the FpML 5.10 messaging framework, which carries tradePackage as a payload type;
  • the ISDA Common Domain Model event model, where lineage ties each trade state to the one before it;
  • the CPMI-IOSCO UTI guidance, which fixes when an identifier continues and when a replacement trade needs a new one;
  • published vendor material on the same subject. Vendor portals are not public, so the vendor picture rests on published course catalogues and product pages — Calypso's training catalogue names the operations (allocation, rollover, termination, netting) and Murex markets life-cycle management at both trade and bulk level — not on internal documentation. The analogous vocabulary for composition concepts is on Trade Structures and Deal Composition.

2.6. Sources

3. See also

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