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

Chapter 7: Clearing and Settlement Flashcards

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1
Q

What is Pre-Settlement and Clearing?

A

Once a trade has been executed, these are the checks that need to be conducted.

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2
Q

What Checks Need to be Conducted Before Settlement can be Completed?

A

Matching the trade instructions, to ensure that the details correspond. Ensure sufficient securities and funds are present.

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3
Q

What is Settlement?

A

The process through which the legal title of ownership is transferred for cash, these occur simultaneously.

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4
Q

What is Post-Settlement?

If you hit the post you’ve fai……

A

The management of failed transactions and the subsequent accounting of trades.

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5
Q

What is the “Trade Confirmation Step”?

A

Where trade details are compared and any mismatches are adressed.

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6
Q

What is Clearing?

A

Is the process through which the obligations held by the buyer and seller to a trade are defined and legally formalised.

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7
Q

What are the Ways in Which Trades Can be Cleared?

There are 2.

A

Bilaterally (between the parties) or via a CCP.

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8
Q

What is the LCH?

What does it do?

A

A multi asset clearing house, with division is the UK and France, provides CCP services for equities called EquityClear

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9
Q

What are the 3 Main US Clearing Houses?

A
  • Depository Trust and Clearing Corporation (DTCC)
  • National Securities Clearing Corporation (NSCC)
  • Fixed Incomes Clearing Corporation (FICC)
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10
Q

What are the 2 Variable Factors Across Different Instruments / Markets?

When settling a trade.

A
  • Timing of Settlement
  • Structure of the Settlement System e.g. DvP of FoP
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11
Q

What is DvP?

What does this mean?

A

Delivery Versus Payement.
Only transferring ownership when the payment is certain to reduce risk.

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12
Q

What is the BIS Model 1?

How does this work?

A

Settle transfer instructions for both cash and securities on a trade by trade basis, transferring each at the same time.

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13
Q

What is the BIS Model 2?

A

Settle transfer instructions, with the securities being transferred throughout the processing cycle (gross), and the funds being transferred at the end of the processing cycle (net).

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14
Q

What is the BIS Model 3?

A

A system that setlles transfer instructions for both securities and funds both at the end of the processing cycle.

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15
Q

Are Overdrafts on Securities Accounts Allowed When Settling Trades?

Are they allowed for funds accounts?

A

No (strictly prohibited)

Yes for fund accounts if the overdraft facility allows it.

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16
Q

What Happens to a Transaction That Fails in Model 1?

Who gets involved?

A

A CCP could be promptly notified and lend/borrowing any shortfall of securities to complete the transaction.

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17
Q

What Does Model 1 Employ for Failed Transactions?

What does this depend on?

A

A queue management system, where incomplete transactions are assesed in order of size of shortfall and lending facilities. The easiest to sort being at the top.
The options avialible depend on the participants ability to interact with the system during the processing cycle.

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18
Q

What is CREST?

Definition.

A

A computer system that settles transactions in shares, gilts and corporate bonds, primaily on behalf of the LSE.

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19
Q

What Services do CREST Execute Simultaneously?

There are 3.

A
  • Updates the register of Shareholders
  • Issues a payment obligation
  • Issues a receipt notification
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20
Q

How can the LCH EquityClear be Settled?

What are the options?

A

On a gross (trade by trade) or net (group) of a similar trade. e.g. If a firm had 20 order execute via SETS, it can have 20 or 1 big transaction.

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21
Q

What is the Settlement Period for Equities? (T+?)

When will this change?

A

T + 2

May 2024 in US and Canada to T+1

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22
Q

What is the Main Risk with Model 2?

How is this managed?

A

The danger of delivering securities before payment. In most cases an assured payment system is utilised, where securities are delivered in exchange for a irrevocable commitment from the buyers bank.

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23
Q

What are the Benefits of Model 2?

Where is it now being used?

A

The easiest model for liquidity efficiencies, particularly popular in emerging markets LATAM and MEA.

24
Q

When Using Model 3, Who Manages the Accounts?

A

The system maintains securities accounts.
A seperate entity may maintain the fund accounts, either a commercial bank or central bank.

25
Q

What Happens When the Transaction Fails (Model 3)?

A

The obliation is a matter of negotiation.

26
Q

Does Model 3 Acheive DvP?

What is this for?

A

Yes, in most cases to eliminate the risk of the seller not receiving their money.

27
Q

What is the Primary Responsibility of a Custodian?

A

To ensure that the clients assets are fully protected at all times.

28
Q

What are the Possible Paths for an Investor When Chosing a Custodian?

A
  • Appoiniting a local custodian in each market
  • Appointing a global custodian to manage custody arrangements across the full range of foreign markets.
  • Making arrangements to settle trades and hold with a CSD within each market or with a ICSD
29
Q

What is Global Custody?

Definition?

A

Provides investment admin for investor clients outside of the country where it is located.

30
Q

When was Global Custody Introduced?

Its old now, but what was it for then?

A

When the Employee Retirement Income Security Act (ERISA) was passed in the US in 1970. It was so that pension funds could not act as custodians for assets in their accounts.

31
Q

What Can A Global Custodian do to Improve Efficeincy?

Geography.

A

Open lots of proprietary branches across different regions to then employ them as local custody providers.

32
Q

What is a Sub-Custodian?

A

Employed by a Global Custodian as its local agent to provide settlement and custody services for assets that it holds n behalf of investor clients in a foreign market.

33
Q

How Might a Global Custodian Select a Sub Custodian?

How might they do this?

A
  • Appoint one of its own branches (when availible)
  • Appoint a local agent bank that specialises in providing sub-custody
  • Appoint a regional provider to the global custodian across a range of markets in a region or globally.
34
Q

What is a Local Custodian?

A

Agent banks that specialise in providing sub-custody in their home market are sometimes known as single market providers.

35
Q

What is the Principal Selling Point for a Local Custodian?

Is this like a freemason?

A
  • They are specialists
  • They have regular dealings with authorities and politicians.
  • They have expert knwoldege
  • may offer reciprocal business.
36
Q

What are the Disadvatages of Using a Local Custodian When Compared to a Regional Custodian?

A
  • Insufficient credit rating
  • Cannot leverage developments in tech
  • May not be able to offer discounts like a regional custodian.
37
Q

What is a Regional Custodian?

A

A entity that can provide bank agent services for multiple markets across a particular region.

38
Q

What are the Advantages of a Regional Custodian?

There are 7 main, think.

A
  • High credit rating
  • Cross fertile good practice (lessons learned from other markets)
  • Leverage innovation in tech
  • Standardised reporting
  • Economies of scale
  • Can secure discounts
  • Levergae for local regulators
39
Q

What are the Disadvantages of a Regional Custodian?

There are only 3, whats wrong with being too big?

A
  • Offerings may be less attuned to local market practice
  • Spreads it focus across a wide range of clients and markets
  • May lack the long track record with clients (good rep)
40
Q

What has the Organisation for Economic Co-Operation and Development (OECD) Tried to Combat?

That a hundred grand!, can you handle that?

A

Restricted the use of bearer shares, for those using them to hid ill gotten gains.

41
Q

What has the UK Done About Bearer Shares?

What about countries that havent done this?

A

Banned them.

Other countries such a Luxembourg, have immobalised them and mandated they must be kept in a authorised depository.

42
Q

What is the Difference Between Nominee and Beneficial Ownership?

A

The “nominee” is the legal owner and takes the registered title.

The “beneficial” owner, receives benefits such as voting rights and dividends etc.

43
Q

What is a Pooled Nominee Company?

What is it AKA?

A

“Onmibus” or “Commingled, whereby individual clients are grouped together within a single nominee of registration.

44
Q

What is a Designated Nominee Company?

What is it AKA?

A

Sometimes called “numbered accounts”. Where the nominee name includes unique identifiers for each individual clients.

45
Q

What is a Sole Nominee Company?

Sole trader??

A

Where a single nominee name is used for specific client.

46
Q

Why Might a Designated or Pooled Structure be Bad for an Individual Investor?

A

The shareholder benefits may not be available as the stockbrokers may be unwilling to undertake the necessary administration to facilitate these benefits.

47
Q

Why Might an Investor Choose to Register With a Sole Account?

Hmmmm…..checking or savings?

A

For provision of requests, e.g. If the Investor requires dividends to be mandated to a particular account, rather than be collected by a custodian.

48
Q

What is a Corporate Nominee?

A

When the issuing company itself provides a facility for its smaller shareholders to hold their shares within a single corporate nominee (designated or sole).

49
Q

What is the Sequence of Events that Lead Up to a Dividend Payment?

5 Periods.

A
  1. Dividend Declared (there is a dividend)
  2. Record or books close date (whos being paid)
  3. Ex-dividend date (BD before didivdend date)
  4. Dividend paid (within 30 days of books)
  5. Ex-dividend period (from ex-div date > div paid) (sold without dividend right)
50
Q

What Happens to Shares that Are Traded Ex-Dividend?

To the price?.

A

It falls to reflect the lack of a dividend, similar to that of accrued interest.

51
Q

Who is Responsible for Claiming the Dividend Paid to the Wrong Person Special ex or Special cum?

A

The broker, due to the poor time keep of the trades.

52
Q

How is CLS Settled?

A

On a PvP (Payment vs Payment) basis

53
Q

What is the Risk that Settlement Will Not be Simultaneous in FX?

A

Herstatt risk

54
Q

How is Herstatt Risk Removed?

With CLS?

A

Members must submit settlement instructions for transactions must be settled that day, and in turn will receive a schedule of what should be paid and when. If this is not met CLS will cancel the transactions.

55
Q

What is DLT?

How does it work?

A

Distributed ledger technology.
A distributed ledger is the consensus of replicated, shared, and synchronized digital data that is geographically spread across many sites, countries, or institutions

56
Q

Example of Where DLT is Used?

People buy who know nothing.

A

Bitcoin.

57
Q

What are the Advantages of the DLT?

A
  • Produce a trustworthy record
  • Prevent single point of failure, due to multiple nodes
  • Very difficult to hack because of many nodes
  • Remove the cost to update a central database.

CISI: Securities (11 decks)

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