Chapter 7 - Clearing And Settlement Process

Question 1

What is the difference between an Omnibus and Designated account?

Answer 1

Omnibus is where all client assets are held in one nominee account, ability to aggregate client orders.
Designated accounts is where client assets are kept in an nominee designation, separately from other clients

Question 2

What is a Book Entry Transfer?

Answer 2

The term used to describe the electronic transfer of securities

Question 3

Securities held in a book entry transfer system are either…

Answer 3

Immobilised - no physical movement of share certificates (USA)
Dematerialised - no certificates, ownership is identified solely on electronic records of the depository (UK)

Question 4

What are the 4 stages of the clearing & settlement process…

Answer 4

Confirmation
Positioning
Settlement
Trade fails

Question 5

What activities do the Central Securities Depositories (CSD’s) undertake?

Answer 5

Safekeeping
Settlement
Transfer of securities on a DVP basis
Income collection/distribution

Question 6

What are custodians?

Answer 6

Banks that specialise in the safe custody of portfolios of shares and bonds on behalf of fund managers

Question 7

What are the three types of corporate action?

Answer 7

Mandatory - does not require intervention from share holder (dividend payment)
Mandatory with options - has a default option that will occur if the shareholder doesn’t specify their action (rights issue)
Voluntary - requires shareholder to make a decision (takeover bid)

Question 8

What is the biggest risk with OTC trades?

Answer 8

Bilateral settlements

Question 9

What type of transaction, provided it meets two requirements, is exempt from the FCA’s Client Assets Sourcebook rules?

Answer 9

Delivery versus payment via a commercial settlement system