Chapter 6: The Role of Technology in the Settlement and Post-Settlement Phases

Question 1

what is DvP?

Answer 1

Delivery-versus-payment (DvP) instruction means that the
process of delivery of securities is linked to the receipt of funds

Question 2

what is FoP?

Answer 2

Free of payment (FoP) instruction means that payment and
delivery are not inextricably linked

Question 3

how are settlement instructions usually transmitted?

Answer 3

• SWIFT
• Proprietary standard message
• Email, fax, telex

Question 4

what does a settlement agent need to do To settle a trade?

Answer 4

ensure the value date has been reached, the seller has the stock to deliver, the buyer has the cash or credit to pay for it, and the instructions of the buyer and seller match

Question 5

what is settling with tolerance?

Answer 5

settle the trade even if if the instructions match except for a minor difference in cash consideration

Question 6

what is a stock loan?

Answer 6

when borrowers acquire a specific quantity of a stock to meet a commitment, while lenders increase their return by loaning stock out for a fee

Question 7

what is a repo?

Answer 7

e lenders borrowing cash at a better rate of interest and borrowers lending cash on a secured basis

Question 8

what is the purpose of a repo transaction?

Answer 8

lower the interest expenses of the seller (of stock), who is also the borrower (of cash)

Question 9

what is the purpose of a stock loan?

Answer 9

the borrower of stock needs to acquire a specific quantity of a given stock to meet a commitment to deliver

Question 10

what effect does Legal and Beneficial Ownership have on a stock lending transaction?

Answer 10

• borrower of securities becomes the nominal owner under UK law, but the lender remains the beneficial owner.
• borrower receives all dividends, coupons, and other corporate action proceeds during the loan period, but has an obligation to repay those proceeds to the lender.
• The borrower also acquires the right to vote at company meetings

Question 11

how may non-cash collateral be used in stock lending agreements?

Answer 11

Lenders may accept non-cash collateral such as government bonds, other types of securities, or letters of credit. The lender can invest this collateral to earn more income beyond the lending fee

Question 12

what is the role of SLIs?

Answer 12

Stock lending intermediaries (SLIs) act as specialized intermediaries, helping to create a liquid and efficient market by providing borrowing services for those who need a large quantity of shares for a long period and have non-cash collateral

Question 13

what is a Tri-Party Repo?

Answer 13

(Delivery-by-Value DBV in UK) is a service for market makers to fund their inventory and lend stock to attract cash collateral

Question 14

what dos segregation of client assets refer to?

Answer 14

the practice of keeping securities belonging to clients in separate accounts, also known as nominee accounts, to comply with regulatory rules and prevent the inadvertent use of client assets in collateral-based transactions

Question 15

what are the technology implications of stock loans and repos?

Answer 15

need technology applications that:
* can manage collateral by revaluing securities,
* communicate with counterparties,
* send settlement instructions,
* calculate interest charges and fees,
* identify available securities,
* update investment and custody records to reflect holdings out on loan.

Question 16

what is the maturity ladder?

Answer 16

provides expected cash movements for a firm’s bank accounts in different currencies for the next few working days. By adding the value of all the transactions that should settle on or before a certain date to the cash balance, a projected balance for that date can be calculated

Question 17

how can firms resolve inadequate funding?

Answer 17

• Transfer excess funds from another nostro account
• Borrowing funds from the money market or via overdraft
• Using repo transaction to exchanging bonds as a collateral.

Question 18

what is the funciton of a settlement system?

Answer 18

holding important reference (static) data, receiving real-time trade feeds, and deciding on how settlement instruction messages should be sent

Question 19

what is an interest accrual?

Answer 19

When a firm enters into any purchase or sale of bonds, stock borrowing, lending and repos, or money market loans and deposits, it needs to account for the interest that will be paid
next

interest that has accumulated on a transaction since the last interest payment date or start date, up but not including the value date

Question 20

where does technology come into interest acrruals?

Answer 20

the firm needs to account for this interest expense on each day that it occurs, not all in one amount at the end of the loan
period

Question 21

what 3 components is SWIFT connectivity based on?

Answer 21

a secure IP-based network, SWIFTNet Link software, and
the store and forward principle

Question 22

what is the secure IP-based network SWIFT is based on?

Answer 22

telecommunications network that uses the Internet Protocol (IP) to transmit messages between SWIFT member firms

Question 23

what is SWIFTNet Link?

Answer 23

suite of software products that ensures communication and dissemination of data between users by providing the functionality required to communicate over these services

Question 24

what is SWIFTNet PKI?

Answer 24

(Public Key Infrastructure) provides the security layer that is essential in the SWIFT environment. It uses digital certificates to provide the highest levels of authentication of institutions, end-users, and servers

Question 25

what is the store and forward principle, why is it used?

Answer 25

communications technique in which messages are sent to an intermediate station where they are kept and sent at a later time to the final destination or to another intermediate station

used because the origin and destination stations
may not be available for communications at the same time

Question 26

what are SWIFT message standards?

Answer 26

set of rules for how financial institutions communicate with each other. The standards define the format of messages, the meaning of each field in a message, and the process for sending and receiving messages

Question 27

what is the FIX protocol?

Answer 27

Financial Information eXchange (FIX) protocol

an open message standard designed to streamline trading processes. FIX is not a network itself, but a two-way conversational link between brokers and institutions, with each connection taking place between applications at each end

Question 28

what is FPML?

Answer 28

Financial products Markup Language (FpML)

XML message standard for the OTC derivatives industry

Question 29

what is XRBL?

Answer 29

Extensible Business Reporting Language (XBRL)

XML message standard for exchanging information about
corporate data such as balance sheets and profit and loss accounts between the company concerned and its auditors, regulators, customers, research analysts and other interested parties

Question 30

what is external reconcilliation?

Answer 30

the act of reconciling data with the settlement agents that operate those accounts on the firm’s behalf

Question 31

what is internal reconcilliation?

Answer 31

checking the data between different computer systems that the company uses

Question 32

what does CASS govern?

Answer 32

the rules of reconciliation of client securities and money

check its records against the actual money it holds for clients in bank accounts and other places, and make sure that the records match up

Question 33

what is post-trade compliance?

Answer 33

involves regularly checking investment positions against a
predefined set of rules to ensure they align with the investment mandate

Question 34

what are the IT implications of post-trade compliance?

Answer 34

Systems need to be developed to create and maintain multi-layered and multi-tiered business rules, have good clean data, and provide a process or scheduler to allow managers to determine when the post-trade compliance rules are run