In both FX derivativies and Equity derivatives worlds, there’s a Affirmation process before the Confirm process. We will focus on FX derivatives but most of it applies to eq derivatives.
Confirm is a legally binding document, accessible by clients, often on paper. Affirm is not legally binding. It’s often based on a phone call between the 2 counterparties. Think of Affirm as a
Q: can we (operations) complete Affirm on a trade without checking with counterparty?
AA: Forbidden. Operations must verify with counterparty before completing Affirm.
Given its legal power, it’s good to know what a confirm document contains. A BofA veteran told me it might say “Blackrock shall pay BofA $1m on 1/1/2013”. There are 2 such confirms, on both sides, to be matched.
For a derivative deal executed on T+0 and settles T + 3mth, Affirmation could happen T + 0/1/2, but Confirmation usually happens right before T + 3mth — real world settlement. Settlement system actually receives the trade around T + 0/1/2, but keeps the trade as unsettled and often reports such unsettled trades on a daily basis.