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