Chapter 7 Clearing and Settlement Flashcards
Repo settlement
T+0
Money market settlement
T+1
Certificated shares settlement
T+10
What does pre-settlement and clearing entail
- Executions of trade
- Matching of trade details
- Confirmation of payment and delivery obligations
- Potential use of clearing houses as central counterparty
What does settlement entail
- Legal title transferred to buyer
- cash value of securities transferred to seller
- Potential use of central securities depositary
What does post settlement entail
- Managing any settlement failures
- Accounting for the settled trades
Describe model 1 - Gross simultaneous settlement of securities and trade
- Transfer of securities and funds on a trade by trade gross basis
- Delivery of security occurs at same time as transfer of funds
MOSTLY IN EUROPE
Describe gross then net model
- Transfer of securities on trade by trade gross basis
- Net settlement of funds at end of processing cycle
- Transfer of securities occurs before transfer of funds
MOSTLY IN US AND EMERGING
Describe net simultaneous settlement of securities and trade
- Transfer of securities and funds on a net basis
- Final net transfer of securities occurs at same time as final net transfer of funds
What is CREST
The majority of transactions in UK equities are settled via an electronic settlement facility called
CREST.
CREST is a computer system that settles transactions in shares, gilts and corporate bonds, primarily on
behalf of the London Stock Exchange (LSE). It is owned and operated by a company that is part of the
Euroclear group of companies, called Euroclear UK & Ireland ltd.
unexpected things that custodians do
managing the client’s cash flows
managing tax reclaims and other tax services in the local market, and
* ensuring that reporting obligations to the regulatory authorities, and to other relevant bodies, are
discharged effectively
What is sub-custodian
APPOINTED BY GLOBAL CUSTODIAN
A sub-custodian is employed by a global custodian as its local agent to provide settlement and custody
services for assets that it holds on behalf of investor clients in a foreign market.
What does local custodian do
APPOINTED BY CLIENT
Appointing a local custodian in each market in which they invest (often referred to as direct custody
arrangements).
Market specialist operating in same market as custody assets trade
What does global custodian do
Appointing a global custodian to manage custody arrangements across the full range of foreign
markets in which they have invested assets.
What does a regional custodian do
Provide agent bank services across multiple markets in a region
Disadvantages of local custodian compared to regional
- Their credit rating may not meet requirements laid down by some global custodians or global
broker-dealers. - They cannot leverage developments in technology and client service across multiple markets
(unlike a regional custodian) – hence product and technology development may lag behind the
regional custodians that they compete with. - They may not be able to offer the price discounts that can be extended by regional custodians
offering custody services across multiple markets.
What is rehypothecation
Use of client’s collateral for own purposes
Who owns the security
Legal owner
Why do shareholders appoint a nominee and how does it work
Busy shareholders often want to avoid the administrative tasks connected with registered title, so
they choose to appoint their stockbroker, or another professional, to act as a nominee. The nominee
takes the registered title to the shares and all the responsibilities that go with it,
but the nominee’s
client retains beneficial ownership. The beneficial owner receives dividends and is entitled to any other benefits’ of the shares such as the ability to vote or participate in other corporate actions. The nominee
is, however, the legal owner. The legal owner has the title of the shares, but has no rights to any of the
benefits of owning the shares.
What are the 4 types of nominee
Designated
Pool
Sole
corporate
Describe designated nominee / numbered accounts
Where the nominee name includes unique
identifiers for each individual client, eg, XYZ Nominees Account 1, Account 2, Account 3.
Investor can attend meeting to vote
Describe sole nominee
Single nominee name per client is used on register. NAME IS ON IT IN DESIGNATED UNIQUE NUMBER IDENTIFER ON IT
Describe pool nominee/ omnibus account/ commingled
Individual clients grouped together within a single nominee registration (voting is difficult)
Describe corporate nominee
A corporate nominee (alternatively referred to as a corporate sponsored nominee) is when the issuing
company itself provides a facility for its smaller shareholders to hold their shares within a single
corporate nominee.
s. It will result in a single entry for all the shareholders together in the company’s
register (like the pooled nominee) but beneath this the issuing company (or its registrar) will be aware of
the individual holdings that make up the nominee
Voting rights and dividend payments forwarded to individual shareholders
What is Herstatt risk
The risk that a bank pays its counterparties an fails to receive a payment in return
What is CLS (Continuous Linked Settlement)
CLS settles transactions on a payment versus payment (PvP) basis. The two parties to an FX transaction
will buy and sell the respective currencies exchanged and the payments made will occur simultaneously.
What are the benefits of CLS
- Payment vs Payment so less Herstatt risk
- More certainty about end of day cash positions
- Volume and value of payments minimised
- Errors minimsed
What is the UK approved payment system
CHAPS
US local payment system
CHIPS
European approved payment system
Target 2
What are the timescales for CLS
The CLS process is focused on a five-hour window each business day from 7.00am to 12 midday in
Central European Time (CET).
By 6.30am CET, the settlement members must submit their settlement instructions for transactions to
settle that day.
At 6.30am, each settlement member receives a schedule of what monies need to be paid
in that day.
From 7.00am, the settlement members pay in the NET funds that are due to settle in each
currency to their central banks, and CLS will then begin to attempt to settle deals.
Between 9 and 12, pay-ins and payouts are finalised
On what basis are CLS payments made
CLS payments are generally made on a net basis, NOT GROSS
What is the standard settlement for UK corporate bonds in CREST after the trade?
UK Government bonds are T+1 but corporate bonds are T+2.
A nominee holder of shares is all of the following, EXCEPT:
The nominee is not the beneficial holder of the shares as it is holding the shares on behalf of someone else; however, it is the legal owner.
A special ex-bargain allows an investor to:
Trade cum-dividend where the seller retains the right to the dividend
What is the normal standard settlement period in developed markets globally?
Standard settlement for most developed markets is now T+2
Notable exceptions are:
Gilts, T-Bonds and JGBs all of which are T+1, as are money market instruments
Repo and securities lending can be done on a T+0 basis.
Certificated stocks settle on a T+10 basis (in the UK)
Your client, Jenny, has stated that she does not wish to participate in an auto-stock lending programme. To comply with Jenny’s wishes her shares would be held within which of the following nominee accounts?:
A designated nominee account would allow Jenny’s shares to be clearly seperated from those of other clients, and the firm, and the nominee can ensure they were not part of any stock lending programme.
A pooled or omnibus nominee account holds multiple clients assets, making it hard to seperate individual holdings for stock lending purposes. Omnibus is an alternative name for a pooled account.
In a stock borrowing and lending agreement which of the following is borrower not obligated to pass back to the lender?
Voting rights
If the lender wants to exercise its right to vote, they should recall the stock in good time so that a proxy voting form can be completed and returned to the registrar by the required deadline. Issues involved in other corporate actions such as capitalisation issues and the consequences arising from any corporate action by the issuer of a security, such as a rights issue, when that security has been lent to another would, prima facie, be to the benefit/cost of the borrower. Under the terms of the loan, it is customary that these costs/benefits flow back to the lender, and the exact manner in which this is implemented should be reflected in the securities lending agreement.
Which of the following is TRUE of a global custody structure?
The investor deals with one custodian based in one country
An investor is considering the most cost-effective way of registering his shares. Which of the following would BEST meet his objective?
An omnibus (also known as pooled) nominee is one where individual clients are grouped together within a single nominee registration and is more cost effective than designated or sole nominees.
When will a UK equities transaction, entered into after 5.15pm on the London Stock Exchange, normally be settled?
Three business days including the day of the trade
T+2 is the norm, irrespective of the time of day the transaction was entered into.
Foreign exchange trades are fed into the continuous linked settlement system. Which of the following could account for the trades not being properly settled?
The net funds that are due to be settled are not passed to their central bank
