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CISI: Securities > Chapter 7: Clearing and Settlement > Flashcards

Chapter 7: Clearing and Settlement Flashcards

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SIE Exam flashcards
1
Q

What is post-settlement?

A

Management of failed transactions and the subsequent accounting of trades

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2
Q

How are trades matched that are conducted via order book?

A

Auto-matched, matching engine is integrated into the technology

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3
Q

What is clearing/clearance?

A

Defines the obligations held by the buyer and the seller in the trade

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4
Q

When does clearing introduce credit risk?

A

When trades are cleared bilaterally, outside a CCP

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5
Q

What is LCH?

A

A multi-asset clearing house

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6
Q

What is LCH’s CCP service for equities called?

A

EquityClear

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7
Q

What is the NSCC and FICC?

A

Subsidiaries of DTCC (Depository Trust and Clearing Corp)
NSCC - National Securities Clearing Corp
FICC - Fixed Income Clearing Corp

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8
Q

What are the 3 models defined by the BIS for DvP settlement?

A

Model 1
Trades settle

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9
Q

What is Model 1 as defined by the BIS for DvP settlement?

A

Trades settle on a gross (trade-by-trade) basis with a final simultaneous exchange of securities and funds between buyer and seller
e.g. CREST

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10
Q

What is Model 2 as defined by the BIS for DvP settlement?

A

Systems settle securities transfers intraday throughout the processing cycle
Funds settle on a net basis, with the final transfer occuring at the end of the processing cycle

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11
Q

What is Model 3 as defined by the BIS for DvP settlement?

A

Securities and funds settle on a net basis with final transfers occurring at the end of the processing cycle

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12
Q

What is the limitations of Model 1?

A

Funding, hard to predict the largest debit balance intraday
Can be based on securities availability
E.g. if we don’t have gilts to deliver we don’t get the cash which is used to settle other things

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13
Q

What does CREST give LSE members that trade frequently traded listed company share trades the option to do?

A

Settle with LCH’s EquityClear CCP

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14
Q

What is an example of a member firm using a LCH as a CCP when trading a single security?

A

To illustrate this, if a firm has 20 orders executed in the same security through the Stock Exchange Electronic Trading Service (SETS), it could choose to either settle 20 trades with LCH ltd (settling on a gross basis), or choose to have all 20 trades netted so that the firm just settles a single transaction with LCH ltd (settling on a net basis).

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15
Q

Where are securities and fund accounts usually held for Model 2 settlement?

A

Securities - in the system
Funds - another entity, e.g. commercial/central bank
Funds settle end of processing cycle

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16
Q

What is the benefit of Model 2?

A

Settle funds on a net basis, reduces frequency of transactions that fail due to insufficient funds

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17
Q

What is the risks of Model 2?

A

Counterparty risk, don’t receive cash

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18
Q

What is utilised to reduce Model 2 counterparty risk?

A

Assured payment system, irrevocable commitment from the buyer’s bank to make payment to the seller’s bank at the end of the processing cycle

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19
Q

What is the most popular settlement model?

A

Model 2

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20
Q

Why is Model 2 popular?

A

Easiest to realise liquidity efficiencies

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21
Q

How are securities transferred in Model 3?

A

Book entry

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22
Q

What is the advantage of Model 3?

A

Reduces funding and security requirements
Everything is netted once/several times a day

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23
Q

What is the risk with Model 3?

A

Can create large liquidity exposures if a participant fails to settle a large net

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24
Q

What are the 3 types of custodian?

A
  1. Appointing a local custodian in each market in which they invest - direct custody arrangements
  2. Appointing a global custodian
  3. Settle trades and hold cash/securities directly in a CSD/ICSD
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25
Q

Why did the term global custody come into usage?

A

ERISA - Employee Retirement Income Security Act

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26
Q

What did ERISA - Employee Retirement Income Security Act mandate?

A

That pension funds could not act as the custodians of the assets held in their own funds. Had to be held in the safekeeping of another bank. Only US banks.

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27
Q

Who are the two largest global custodians?

A

BNY Mellon
State Street

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28
Q

What is a sub-custodian?

A

Employed by a global custodian as its local agent to provide settlement and custody services on behalf of clients in foreign market.
E.g. BNP

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29
Q

What is local custodian?

A

Provide sub-custody in their home market, local market specialists
E.g. Bank Hap

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30
Q

What is a regional custodian?

A

Offers regional custody, e.g. HSBC in Asia

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31
Q

What is a nominee shareholder?

A

Nominee that holds shares on behalf of the beneficial owner

32
Q

What is the reasoning behind choosing a nominee shareholder?

A

Reduces administrative burden, safe custody
Quicker processing times

33
Q

What is a pooled nominee?

A

Omnibus/Commingled
Clients are grouped together

34
Q

What is a designated nominee?

A

Numbered accounts
Nominee name includes unique identifies for each client
E.g. JPMCC Account 1, JPMCC Account 2

35
Q

What is a sole nominee?

A

Single nominee name used for client

36
Q

Why would an investor choose designated (dividends)

A

Some investors require dividends to be mandated to a specific bank account, no possible with Omnibus

37
Q

What is a corporate nominee?

A

Issuing company provides a facility for smaller shareholders to hold their shares under one corporate nominee

38
Q

How can a corporate nominee be related to a halfway house between pooled and designated nominee?

A

Whilst single entry on the register, the issuing company will have visibility on the individual holdings that make up the nominee
Can forward dividend payments to individual shareholders

39
Q

What is the cost of an individual registration?

A

Fairly minimal, relative to overall custody and securities lending charges

40
Q

What is record date?

A

The date which a copy of the shareholders register is taken. These will be paid the next dividend. EOD

41
Q

What is the ex-dividend date?

A

Business day before record date. Typically thursday

42
Q

How long from record day does a company pay dividend?

A

30 days

43
Q

What is the ex-dividend period?

A

Period between ex-dividend date up to dividend payment date.

44
Q

Between what dates are shares traded without dividend right?

A

Ex-dividend date (day before record date) and Dividend payment date

45
Q

How does settlement periods affect dividends?

A

If record date is Friday, and a security is T+2, this will have to be traded by Wednesday in order to appear on the register.

46
Q

When is a share traded cum-dividend?

A

All dates but the ex-dividend period

47
Q

What is a special cum-trade?

A

Special arrangement where during ex-dividend date the buyer does receive the next dividend

48
Q

When can a special cum-trade be executd?

A

Up to and before the payment date. Not on or after the payment date.
During ex-dividend period

49
Q

What is a special ex trade?

A

Bought during cum-dividend period but does not receive the dividend

50
Q

When is special ex possible?

A

In the 10 business days prior to the ex-date

51
Q

Why would a buyer do special ex/cum trade?

A

Usually tax reasons
Dividends are subject to income tax

52
Q

What is continuous linked settlement?

A

The process where large banks manage FX settlement among themselves

53
Q

Who manages CLS? (Continuous Linked Settlement)

A

CLS Group Holdings

54
Q

Who regulates CLS? (Continuous Linked Settlement)

A

Federal Reserve Board of New York

55
Q

How does CLS settle transactions?

A

On a PvP (payment-versus-payment) bassi.

56
Q

What is Herstatt risk?

A

Settlement risk in FX where swaps are not paid simultaneously

57
Q

How were FX transactions settled prior to CLS?

A

Two separate payment legs

58
Q

What caused the introduction of CLS?

A

26 June 1974 - German Regulators put Bankhaus Herstatt into liquidation
Had received FX payments in the dat but had not yet made any payments
Could not make payments, banks that had paid in were left short

59
Q

How does CLS work?

A

Payment from one party is only made if there is a payment coming in the opposite direction

60
Q

Why was Central European Time window chosen for CLS?

A

To allow an overlap for all global markets

61
Q

What time zone does CLS operate in?

A

7am-Midday CET (Central European Time)

62
Q

Which banks pay using CLS?

A

Central banks

63
Q

What is distributed ledger technology?

A

Replacement of a centralised ledger with a decentralised network of computers all holding copies of exactly the same ledger

64
Q

How are changes done to a distributed ledger?

A

By consensus from ‘nodes’

65
Q

What is securities driven and cash driven motivations in stock lending?

A

Securities Driven
Firms borrow to facilitate operations
Cash Driven
Firms lends to increase returns

66
Q

How are securities lending fees usually quoted?

A

Annualised percentage of the value of the loaned securities

67
Q

What does it mean for a fee to be quoted as a rebate?

A

If cash collateral is agreed, the lender will earn interest that accrues on the cash - and will rebate an agreed rate of interest to the borrower.

68
Q

When do short positions have to be declared?

A

In Europe, %s of total share capital
>0.1% - declared to Regulator
>0.5% - declared to public

69
Q

What is a haircut?

A

The amount that the collateral exceeds the market value of the borrowed assets

70
Q

What does SBLI stand for?

A

Stock Borrowing and Lending Intermediary

71
Q

What do SBLIs do?

A

Act an intermediary between those who want to lend (pension funds) and those who want to borrow (hedge funds)

72
Q

Why would a custodian bank offer an SBLI service?

A

Custodian banks often run as a loss-making activity.
SBLI supplements income

73
Q

What is a manufactured dividend?

A

Dividend or coupons passed back to the lender

74
Q

What does a lender need to do in order to vote?

A

Recall the shares

75
Q

What is the GMSLA?

A

Global Master Securities Lending Agreement
Market standard agreement for securities lending

76
Q

What is the difference between Stock Lending and Repo?

A

Stock Lender charges fee to the borrower
Repo counterparty pays or receives rate of interest

77
Q

What is the variation margin?

A

The pre-agreed band that collateral value may be before a margin payment is madde.

CISI: Securities (10 decks)

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