Chapter 6: The Role of Technology in the Settlement and Post-Settlement and Post Settlement Phases Flashcards
How Are Parties and Settlement Agents Usually Identified?
- BIC
- Central Security Depository (CDS)
3 types
How Does Technology Help in the Transmission of Settlement Instructions?
Methods of Comms
- SWIFT messages
- Proprietary Message Standard- Custodians, CDS and ICDS, used to use computer, now they use web applications.
- Email, fax and Telex - Replaced by automation processes due to op risk associated
What is a Status Code?
Each settlement agent will issue its customers with a list of status codes and their meanings.
How Often?
When Do CSDs or ICSDs Make This Information Available?
Most in Real Time
Some Commercial Custodians send it SWIFT, once at the end of each day.
Y/N?
Can a Trade Status Change Between the Time that the Instructions were Received by the Agent and the Time it Actually Settles?
Yes.
Many times is possible.
4 Reasons
The Settlement Agent Will Settle the Trade Provided That?
- The value date has been reached
- The seller has the stock to deliver
- The buyer has the cash or credit to pay for it
- The sellers instructions match the buyers instructions
What is Settlement Within Tolernace?
To settle a trade if every aspect matches apart from a minor differnece in cash consideration.
Euroclear threshold is 25 dollars.
What is the Benefit of Trade Reference Numbers?
It produces a unique code, so that the process can be automated and update the trade records with the latest status of instructions.
Lender and Borrower
What are the Motivations of a Repo Transactions?
Lender: is to borrow cash at a better rate of interest than it would if it borrowed on an unsecured basis.
Borrower: is to lend cash on a secured basis
Opposite of a Stock lend
Ownerships?
What Characteristics do Stock Loans and Repo Concepts Share?
They both use collateral to reduce the lenders credit risk.
They both employ the conept of nominal ownership and beneificial ownership.
Lending Fees Difference?
In a stock loan transaction there is interest paid by the lender of the stock, as well as a fee paid by the stock borrower.
In the case of repos, only the collateral interest is payable at the agreed interest rate.
How Big is the Securities Lending Industry Said to Be? (Value)
28.5 trillion euros (EO 2022)
4 reasons
Reasons for Borrowing Securities?
- To cover margin calls on short positions (if they dont won enough stock)
- Borrow stock to cover delivey failures.
- Hedge funds who sell stocks short (anticipate a fall in price)
- Hedge funds also use lending as a means to be able to vote in company meetings etc.
Reasons for Lending Securities?
Traditional funds will only exercise long positions. This means they are prepared to lend stock because of the fee they receive for doing so.
Reasons for Using Repos?
A fund can use their long positions as collateral in exchnage for cash and at a lower rate, to fund their trading book.
Whats the differnece?
Legal and Benficial Ownership?
Under UK law the borrower become the nominal owner of the secuirties. (Holds the assets and can vote at meeting)
Lender is still the benficiary owner, meaning they are entitled to any dividends paid etc over this period.
What happens if a client wants their stock back?
What is an SLI? What does it do?
Stock Lending Intermediary
For large order they have a long list of fund manager clients, who will divide up a large order between them into smaller parcels for shorter periods.
If a client needs their stock back they can give it back and lend from another firm.
What are Tri Party Repo Services and Delivery by Value?
The process involves the simultaneous delivery of all documents necessary to give effect to a transfer of securities in exchange for the receipt of the stipulated payment amount.
What is an Example of Other Custodian Services?
Automating Borrowing.
Whereby Euroclear sees a member is unable to deliver shares (A), it will find somebody (B) to lend to (A) for a fee which is shared between Euro and B. Member A and B are unaware of eachother
What are “Nominee Accounts”?
Whereby CSD have to keep client assets in seperate accounts for regulatory purposes.
What is the Effect of the UK Regulators Rules on Securities Segregation?
Client assets may not be used in stock lending or repo transactions without the express written agreement of the client concerned.
5 reasons
Technological Implications of Stock Loans and Repos?
- Manage collateral (Value, deposit and send messages)
- Send relevant instructions to settlement agents to settle transactions.
- Calculate collateral interest charges.
- Identify Securities
- Ensure custody records are reported accuratley (Reg)
Definition?
What is the Definition of an Accural?
Method of accounting in which each item is entered as it is earned or incurred, regardless of when actual payments are received or made.
What is the Defintion of Accured Interest?
The interest that has accumulated on a transaction since the last interest payment date or start date, but not including the value date.
