7. Clearing and settlement Flashcards
What are the 3 stages associated w clearing and settlement?
- pre-settlement and clearing
- settlement
- post-settlement
What is involved in pre-settlement and clearing
- execution of trade
- matching of trade details
- confirmation of payment and delivery obligations
- potential use of CCP as clearing house
What is involved in settlement>?
- legal title transferred to buyer
- cash value of securities transferred to seller
- potential use of central securities depositary
What is an example of a CSD?
Euroclear UK and Ireland
What is the system used for settlement in the UK?
CREST
- owned by Euroclear UK and Ireland
What is involved in post-settlement?
- managing any settlement failures
- accounting for the settled trades
What is the usual settlement time?
T+2
When is settlement T+1?
- new equity issues
- government bonds (UK, US and Japan)
- money market instruments
How long does it take to settle certificated transfers?
T+10
How long does it take to settle REPO and stock borrowing and lending?
T+0
How long does it take to settle F/X Forward?
T>2
What are settlement systems/models?
Settlement models that fulfill delivery vs payment (DvP) requirements
What are the 3 main settlement models?
- Gross, simultaneous settlement of securities and funds
- Gross settlement of securities followed by net settlement of funds
- Net simultaneous settlement of securities and funds
What are the features of model 1?
- 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
What are the features of model 2?
- 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
What are the features of model 3?
- electronic book entry of securities and funds on net basis at end of processing cycle
- delivery and payment occur at same time
What services do custodians/depositaries offer?
- 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
What are 3 main types of custodian?
- global custody
- sub-custody
- local custodian
- regional custodian
What is a global custodian?
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
What is a local custodian?
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
What is sub-custody?
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
Who appoints a sub custodian?
The global custodian
- therefore the risk is where them
What is a sub-custodian also referred to as?
Local agent
What is a regional custodian?
A custodian who is able to provide agent bank services across multiple markets in a region
What is prime brokerage?
Generic name for a bundled package of services offered by IBs to hedge funds
What are typical prime brokerage services?
- stock lending and borrowing (can become SBLI)
- leveraged trade execution
- cash management
- core settlement - manage DvP on transactoions
- custody
- rehypothecation
What can a prime broker also be known as?
One stop shop
What are the 4 main types of nominee accounts?
- pooled nominee
- designated nominee
- sole nominee
- corporate nominee
What is a pooled nominee account?
- Investor’s shares pooled with those of other investors
- Broker’s nominee name appears on the register of members
- AKA omnibus account
- cheapest option
What is a disadvantage of pooled nominee accounts?
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
What is a designated nominee account?
- 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
Who usually appoints brokers as nominees?
Retail clients as they don’t usually have memberships to settlement systems
What is a nominee account?
Where investor appoints a nominee company (usually broker) to become legal owner of securities
- investor becomes beneficial owner (still has rights to benefits)
What are the benefits of ownership?
- dividends
- voting rights
What is a corporate nominee account?
- 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
what is a sole nominee account?
- Single nominee name per client is used on the register
What is the Herstatt risk?
Risk that a bank pays its counterparties and fails to receive payment in return
What is gross settlement?
when entire value of each deal is paid to the other party
What is the settlement solution for the FX market to mitigate Herstatt risk?
Continuous linked settlement (CLS)
What is CLS?
A cross-currency settlement system operated by CLS bank
What are the benefits of the CLS system?
- payment vs payment
- more certainty about e.o.d cash positions
- Volume and value of payments is reduced
- errors minimised
What is the process of a FX trade under the CLS system?
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
What is the approved payment system for payments between CBs and investors in the UK, US and Europe?
UK: CHAPS
Europe: Target 2
US: CHIPS
