It’s worth noting that the derivatives trading lifecycle is considerably longer and more complicated than the lifecycle associated with simple equity trades. Indeed, trading derivatives requires creating and maintaining complex legal contracts that may evolve over months or years.
| Stage | Activity | Definition |
| 1. Pre-trade | Bilateral documentation and internal approvals | Overall parameters of trading activities are established through a bilateral master agreement. Counterparty credit reviews are conducted to establish credit lines and trading limits. |
| 2. Trade | Trade execution | Parties agree on terms via phone, fax, and/or electronic means. |
| 3. Post-trade | Trade capture | Trade details are captured for processing and risk management. This may be manual (via trade tickets) or electronic. |
| | Trade affirmation or matching | Trade details may be provided by one party and affirmed by the other, or each party may exchange records for matching. |
| | Confirmation | Final confirmation of the trade details are secured and exchanged. Confirmations may be paper- or electronic-based. |
| | Settlement | Cash or other assets are exchanged per the terms of the contract. |
Firms serving as custodians of the contract need to maintain information about terms and conditions, as well as ensure that these are properly settled. Such information must also be recorded and shared among appropriate parties.
