Chapter 14 study Notes

Question 1

Uniform Practice Code

Answer 1

sets standards for clearing and settlement procedures to be used by members when dealing with each other. These

Question 2

carrying

agreement.

Answer 2

1. Execution and clearing of trades
2. Preparation and mailing of confirmations
3. Preparation and mailing of statements
4. Settlement of dealer-to-dealer transactions
5. Cashiering functions
6. Stock loan and margin activities
7. Recordkeeping
8. AML/CIP Compliance

Question 3

clearing arrangements

Review of Agreements

Answer 3

When a clearing member enters into a new agreement with an
introducing firm or amends an existing agreement, it must submit the agreement to FINRA for review
and approval. When an introducing member enters into a new agreement with a clearing firm or amends
an existing agreement, it must submit the agreement to FINRA for review

Question 4

DVP settlement

Answer 4

Accounts are subject to reg t settlement however if issues arise The broker-dealer has up to 35 calendar days to complete delivery of the security
for a DVP customer.

Question 5

Prime Broker Arrangement

Answer 5

Client can trade at multiple institutions that then send reports/account balances activity etc. to the prime broker who completes one set of reports for all activity.

Question 6

Regular Way Settlement

Answer 6

For
corporate stocks and bonds and municipal securities, the settlement for a regular-way transaction is
two business days after the trade date (T + 2). For Treasury securities and options, settlement occurs
one business day after the trade date (T + 1). Cash transactions settle on the same day as the trade

Question 7

Settlement

Sellers Option

Answer 7

When the settlement cannot be completed on a regular-way or for-cash basis, the
seller may request settlement by seller’s option. At the time of the transaction, both parties to the
trade may agree to a seller’s option, which gives the selling firm additional time beyond the normal
two business days to make good delivery. When the securities become available for delivery, the
seller must give the buyer a one-business-day written notice that the securities will be delivered the
following business day. The selling firm may then request that payment be made by the buyer in good
transferable funds such as a certified or cashier’s check, in bank drafts, or in cash.

Question 8

Book-Entry Settlement

Answer 8

Rather than making physical delivery of securities or cash when settling
securities trades, many firms use book-entry settlement. However, if a firm wishes to use book-entry
settlement, all transactions in depository eligible securities must be settled through a registered securities
depository such as the National Securities Clearing Corporation, or Depository Trust and Clearing
Corporation.

Question 9

Variable contract payments

Answer 9

 By the end of the third business day following receipt of a customer’s order
 By the end of one business day following receipt of a customer’s payment, whichever is the later date
 If a broker-dealer receives payment from another broker-dealer or dealer bank, it must transmit the
funds to the investment company within two business days after receiving the money.

Question 10

dealer Sell-Out

Answer 10

If a selling broker-dealer makes good delivery to a buying broker-dealer and the buying
broker-dealer refuses to accept the securities, the selling broker-dealer has the right to sell the
securities immediately, without notice, in the open market, and to charge the buying broker-dealer
with any loss that has been incurred.

Question 11

dealer Buy-In

Answer 11

Buy in when securities weren’t sent to the broker. The receiving broker buys the securities and charges the delivering broker dealer the difference.

Question 12

dealer Buy in time frames

Answer 12

Three days after settlement

The delivering broker should be notified no later than 2 business days at 12;00 noon that a buy in will occur.

Question 13

Notice of Closeout

Answer 13

A member that buys in or sells out another member must notify the other
member of such action on the same day.

Question 14

dealer Buy In Time Frames Extension

Answer 14

a selling broker, once notfiied of a buy in, can send the broker dearler notice that the securities are in transit. The have to include the certificate numbers and the closeout is deferred for seven calendar days.

Question 15

Client Sell Out

Answer 15

T+5 unless an extension is granted

Question 16

Client Buy-In

Answer 16

S + 10

Question 17

reclamation

Answer 17

The process of returning previously accepted securities is referred to as reclamation.

Question 18

Notice of Dividends

Answer 18

SEC Rule 10b-17 requires issuers of securities to report to FINRA (not the
SEC) all dividends and other distributions at least 10 days prior to the record date.

Question 19

Calculations

MSRB rules

Answer 19

 Accrued interest must be truncated to three decimal places and then rounded to two places.
 Dollar prices must be truncated to three decimal places.
 Yields must be truncated to four decimal places and rounded to three.

Question 20

corporate bond interest calculatioin

Answer 20

Interest = (Principal x Rate x Days of interest)
360
Interest = ($10,000 x 10% x 106)
360
Interest = $294.44

Question 21

Bulk Transfers of Variable Contracts and Annuities

Answer 21

FINRA rules do not permit the
transfer of variable annuity contracts and/or mutual funds held directly at the issuer through the
use of a negative consent letter. Transfers of these products from one broker-dealer to another
require affirmative consent on the part of the customer through a signed client authorization sent to
the issuer to change the broker-dealer of record.