A trade confirmation is a written or electronic record, issued after a transaction in a financial instrument has been executed, that sets out the terms the parties agreed. It allows each side to check that its own record of the deal is the same as the other's, provides evidence of the contract, and supplies the details needed for settlement. Confirmations are exchanged for trades in shares, bonds, foreign exchange, money market deals and derivatives.
The word covers two slightly different things. In securities markets, a broker sends a confirmation to its client, which is a one-way notice of what was done on the client's behalf. Between two dealing counterparties, as in foreign exchange and derivatives, each side confirms to the other and the two confirmations must agree. In both cases confirmation follows execution and precedes settlement, and it sits alongside trade allocation, trade affirmation and trade matching in the post-trade sequence.
What a confirmation contains
The contents depend on the product, but a securities confirmation normally states the parties and the capacity in which the firm acted, as agent or as principal; the security and its identifier; whether the trade was a purchase or a sale; the quantity and price; the trade date and settlement date; accrued interest for bonds; commission, fees and taxes; the net amount payable; and the place of execution. A foreign exchange confirmation gives the two currencies and amounts, the rate, the value date and the accounts to which each currency is to be paid. A derivative confirmation records the full economic terms, such as the notional amount, payment dates, rates and termination date, and refers to the legal agreement that governs the relationship.
Confirmations in securities markets
For individual investors, the confirmation, often called a contract note, is a regulatory disclosure. In the United States, a rule of the Securities and Exchange Commission requires broker-dealers to send customers a written confirmation at or before completion of a transaction, disclosing among other things the price, the firm's capacity and its remuneration. In the European Union, MiFID II requires investment firms to give clients prompt notice of execution, for retail clients no later than the first business day after the trade.
For institutional investors, the confirmation is an electronic message for each account in a block order. The investor or its custodian compares it with its own records and affirms it, or the two sides submit their details to a central matching service. Confirmations are commonly carried over SWIFT or industry platforms; the ISO 15022 message used for a client confirmation of a purchase or sale is the MT515.
Confirmations in foreign exchange and derivatives
In treasury markets, dealers agree trades by voice or on electronic platforms, and the treasury back office of each party sends a confirmation independently of the dealers. Foreign exchange confirmations between banks typically use the MT300 message and money market loan and deposit confirmations the MT320. The two messages are compared automatically, and any that do not agree are investigated before payment is made.
For OTC derivatives, the confirmation is a legal document that supplements the parties' master agreement and incorporates standard market definitions. In the early 2000s, rapid growth in credit derivatives left dealers with large backlogs of unsigned paper confirmations, which supervisors identified as a serious operational weakness. The industry responded by moving to electronic confirmation platforms, and regulators later set deadlines. Under the European Market Infrastructure Regulation, uncleared derivatives must be confirmed, where possible by electronic means, within time limits that for most financial counterparties end on the business day after the trade. Further detail is given in the entry on derivative trade confirmation.
Role as a control
Confirmation is one of the basic controls over trading activity. Because it is produced and checked by staff who are independent of the traders, it tests whether deals recorded in the front office really exist and were done on the stated terms. This segregation of duties matters: in several well-known cases of unauthorised trading, losses were hidden with fictitious trades that were never confirmed with an outside party, or whose confirmations were intercepted. Standard practice is therefore that confirmations are sent to and received from a counterparty's operations area, that unconfirmed trades are tracked and escalated by age, and that settlement instructions are not changed on the strength of a confirmation alone.
Limitations
A confirmation shows agreement on terms, not ability to perform: a confirmed trade can still end in settlement failure. Its legal weight varies. In most markets the contract is formed at execution and the confirmation is evidence of it, so disputes can arise when the confirmation differs from a recorded conversation or platform log. Shorter settlement cycles also reduce the time available to issue and check confirmations, which has pushed firms towards same-day, automated processing.