5- safe custody, settlement and prime brokerage

Question 1

purpose of CSDs?

Answer 1

= central securities depository
admin
- DELIVERY VS PAYMENT settlement to REDUCE SETTLEMENT RISK
-admin on rights/bonus issues
-manages divi mispayment
-proxy voting
-stock borrowing and lending
-repos

Question 2

4 CSDs

Answer 2

central securities depositories

EUI - euroclear UK and Ireland
- operates CREST settlement system

DTCC - depository trust and clearing corporation
-worlds largest post trad fin. services company

JASDEC - Japanese secs depositary cetnre

Euroclear and clearstream

Question 3

settlement risk in FX market

Answer 3

Hershatt risk - risk bank pays its counter parties and fails to recieve payment in return
- because FX market is 24 hours and institutions arent

Cure: continunous linked settlement (CLS)
- cross currency settlement system operated by CLS bank
- payment vs payment system
-settlement focused on 5 hr window, nets off transactions to minimise admin error

Question 4

quote driven vs order drive system

Answer 4

quote - MM provide continuours 2 way prices throughout trading day
- SEAQ is e.g. of quote driven system

order driven - e.g. SETS
investors (or agents) indicate no. of secs they want to buy and sell and what price - system brings together buyers and selelrs

Question 5

what is the point of CCP and Crest

Answer 5

CCP - provided by LSE reducesdefault risk via margin collection
CREST protects against settlement risk through DvP

Question 6

eurobond settlement?
UK and US gov bond settlement?

Answer 6

eurobond = T+2
gov debt = T+1

Question 7

settlement for first leg of gilt repo

Answer 7

T+0