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Unit 2: Securities > 7. Clearing and settlement > Flashcards

7. Clearing and settlement Flashcards

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SIE Exam flashcards
1
Q

What are the 3 stages associated w clearing and settlement?

A
  1. pre-settlement and clearing
  2. settlement
  3. post-settlement
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2
Q

What is involved in pre-settlement and clearing

A
  • execution of trade
  • matching of trade details
  • confirmation of payment and delivery obligations
  • potential use of CCP as clearing house
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3
Q

What is involved in settlement>?

A
  • legal title transferred to buyer
  • cash value of securities transferred to seller
  • potential use of central securities depositary
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4
Q

What is an example of a CSD?

A

Euroclear UK and Ireland

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5
Q

What is the system used for settlement in the UK?

A

CREST

  • owned by Euroclear UK and Ireland
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6
Q

What is involved in post-settlement?

A
  • managing any settlement failures
  • accounting for the settled trades
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7
Q

What is the usual settlement time?

A

T+2

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8
Q

When is settlement T+1?

A
  • new equity issues
  • government bonds (UK, US and Japan)
  • money market instruments
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9
Q

How long does it take to settle certificated transfers?

A

T+10

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10
Q

How long does it take to settle REPO and stock borrowing and lending?

A

T+0

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11
Q

How long does it take to settle F/X Forward?

A

T>2

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12
Q

What are settlement systems/models?

A

Settlement models that fulfill delivery vs payment (DvP) requirements

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13
Q

What are the 3 main settlement models?

A
  1. Gross, simultaneous settlement of securities and funds
  2. Gross settlement of securities followed by net settlement of funds
  3. Net simultaneous settlement of securities and funds
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14
Q

What are the features of model 1?

A
  • electronic book-entry transfer of securities and funds on a trade-by-trade gross basis
  • final transfer of securities (delivery) ocurring at same time as final transfer of funds (payment)
  • mostly used in europe
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15
Q

What are the features of model 2?

A
  • electronic book-entry transfer of securities on trade by trade gross basis
  • net settlement of funds at end of processing cycle
  • delivery occurs before payment
  • used in US and popular emerging markets
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16
Q

What are the features of model 3?

A
  • electronic book entry of securities and funds on net basis at end of processing cycle
  • delivery and payment occur at same time
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17
Q

What services do custodians/depositaries offer?

A
  • safekeeping; ensure client assets fully protected at all times (via segregation of assets)
  • admin; facilitate DvP, corporate actions, linked w registrars and regulators, provide market info
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18
Q

What are 3 main types of custodian?

A
  • global custody
  • sub-custody
  • local custodian
  • regional custodian
19
Q

What is a global custodian?

A

manages custody arrangements across full range of foreign markets in which they have invested assets

  • one stop shop if you are invested all over the world
20
Q

What is a local custodian?

A

Market specialist operating in the same market as the custody assets trade

  • good if all your investments are in one country
  • helpful for specialist market info
21
Q

What is sub-custody?

A

Where local agent is appointed to provide settlement and custody services for assets that a global custodian holds on behalf of clients in foreign market

  • used for global custodians to outsource when they do not have a presence in a particular country
22
Q

Who appoints a sub custodian?

A

The global custodian

  • therefore the risk is where them
23
Q

What is a sub-custodian also referred to as?

A

Local agent

24
Q

What is a regional custodian?

A

A custodian who is able to provide agent bank services across multiple markets in a region

25
Q

What is prime brokerage?

A

Generic name for a bundled package of services offered by IBs to hedge funds

26
Q

What are typical prime brokerage services?

A
  • stock lending and borrowing (can become SBLI)
  • leveraged trade execution
  • cash management
  • core settlement - manage DvP on transactoions
  • custody
  • rehypothecation
27
Q

What can a prime broker also be known as?

A

One stop shop

28
Q

What are the 4 main types of nominee accounts?

A
  • pooled nominee
  • designated nominee
  • sole nominee
  • corporate nominee
29
Q

What is a pooled nominee account?

A
  • Investor’s shares pooled with those of other investors
  • Broker’s nominee name appears on the register of members
  • AKA omnibus account
  • cheapest option
30
Q

What is a disadvantage of pooled nominee accounts?

A

when a company holds AGM only issues one invite (to broker) as that is name on register

  • therefore investor must exercise voting rights through broker
31
Q

What is a designated nominee account?

A
  • Investor’s shares held in separate pool
  • An individual designation appears on the register of members
  • as many entries on company register as designated nominee account (still held in brokers name but with identifying numbers for each investor)
  • investor can therefore attend meetings as proxy of broker
32
Q
A
33
Q

Who usually appoints brokers as nominees?

A

Retail clients as they don’t usually have memberships to settlement systems

34
Q

What is a nominee account?

A

Where investor appoints a nominee company (usually broker) to become legal owner of securities

  • investor becomes beneficial owner (still has rights to benefits)
35
Q

What are the benefits of ownership?

A
  • dividends
  • voting rights
36
Q

What is a corporate nominee account?

A
  • hybrid account whereby all investors are grouped together
  • nominee company is owned by the issuing company
  • The company itself holds shares within a single entry
  • Forward single dividends to each individual and other perks (can do this as issuing company knows all individual members in the account)
  • therefore investors can attend meeting
37
Q

what is a sole nominee account?

A
  • Single nominee name per client is used on the register
38
Q

What is the Herstatt risk?

A

Risk that a bank pays its counterparties and fails to receive payment in return

39
Q

What is gross settlement?

A

when entire value of each deal is paid to the other party

40
Q

What is the settlement solution for the FX market to mitigate Herstatt risk?

A

Continuous linked settlement (CLS)

41
Q

What is CLS?

A

A cross-currency settlement system operated by CLS bank

42
Q

What are the benefits of the CLS system?

A
  • payment vs payment
  • more certainty about e.o.d cash positions
  • Volume and value of payments is reduced
  • errors minimised
43
Q

What is the process of a FX trade under the CLS system?

A

if two banks want to execute an FX trade must first inform their respective CBs

  • CBs then inform the CLS bank
  • CLS bank does not allow either CB to transfer until it knows both are ready
  • gives CBs very tight window of time to complete transaction
44
Q

What is the approved payment system for payments between CBs and investors in the UK, US and Europe?

A

UK: CHAPS

Europe: Target 2

US: CHIPS

Unit 2: Securities (13 decks)

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