Clearing and settlement

Question 1

Three stages of clearing:

Answer 1

Pre-settlement and clearing
Settlement
Post settlement

Question 2

All securities settle T+2 except:

Answer 2

Equity (new issues T + 1, certificated T + 10)
Bonds (Gilts T + 1 cash, US T-Bonds T + 1, JGBs T + 1)
Others (Repo T+ 0, Money market T + 1, F/X forward > T + 2)

Question 3

Organising delivery vs payment model 1

Answer 3

– Gross, simultaneous settlement of securities and funds
• Electronic book-entry transfer of securities and funds on a trade-by-trade gross basis
• Final transfer of securities (delivery) occurring at the same time as final transfer of funds
(payment)
• Mostly used in Europe

Question 4

Organising delivery vs payment model 2

Answer 4

– Gross settlement of securities followed by net settlement of funds
• Electronic book-entry transfer of securities on a trade-by-trade gross basis
• Net settlement of funds at the end of the processing cycle
• Final transfer of securities (delivery) occurs before the final transfer of funds (payment)
• Used in the US and popular in emerging markets

Question 5

Organising delivery vs payment model 3

Answer 5

– Net simultaneous settlement of securities and funds
• Electronic book-entry transfer both securities and funds on a net basis
• Final net transfer of securities (delivery) occurring at the same time as final net transfer of funds
(payment)

Question 6

Custodianship services

Answer 6

• Safekeeping
- Primary responsibility is to ensure that client assets are fully protected at all times
• Segregation of assets
• Administration
- Facilitate delivery vs. payment (DvP)
- Corporate actions
- Links with registrars
- Provides market information
- Links with regulators

Question 7

Types of custody

Answer 7

• Global custody
- Manages custody arrangements across the full range of foreign markets in which they have invested assets
• Sub-custody
- Where a local agent is appointed to provide settlement and custody services for assets that a global custodian holds on behalf of clients in a foreign market
• Local custodian
- Market specialist operating in the same market as the custody assets trade

Question 8

Regional custodian:

Answer 8

A regional custodian is able to provide agent bank services across multiple markets in a region.

Question 9

When an institutional investor invests in securities, it will commonly employ the services of a custodian to administer these securities by:

Answer 9

• Providing safe keeping of the investor’s assets in the local market
• Making appropriate arrangements for delivery and receipt of cash and
securities to support settlement of the investor’s trading activities in that market
• Providing market information to the investor on developments and reforms within that market
• Collecting income payments, such as dividend income and interest paid on debt securities n the local market
• Managing the client’s cash flows
• Monitoring and managing entitlements through corporate actions and voting rights held by the investor in the local market
• Managing tax reclaims and other tax services in the local market
• Ensuring that securities are registered and that transfer of legal title on securities transactions proceeds effectively
• Ensuring that reporting obligations to the regulatory authorities, and to other relevant bodies, are discharged effectively

Question 10

What is a prime brokerage?

Answer 10

Prime brokerage is the generic name for a bundled package of services offered by investment banks to hedge funds

Question 11

Typical services of a prime brokerage

Answer 11

Stock lending and borrowing
Leveraged trade execution
Cash management
Core settlement (manage delivery and payment on transactions)
Custody (safekeeping and administration of assets)
Rehypothecation (use of a client’s collateral for own purposes)

Question 12

Bearer securities:

Answer 12

Legal owner is the holder of the investment

Question 13

Registered securities:

Answer 13

Legal owner recorded on a central register

Question 14

Nominee accounts:

Answer 14

Pooled nominee
• Investor’s shares pooled with those of other investors
• Broker’s nominee name appears on the register of members
• AKA omnibus account
Designated nominee
• Investor’s shares held in separate pool
• An individual designation appears on the register of members
Sole nominee
• Single nominee name per client is used on the register
Corporate nominee
• The company itself holds shares within a single entry
• Forward single dividends to each individual and other perks

Question 15

Gross settlement:

Answer 15

Entire value of each deal is paid to other party

Question 16

Herstatt risk:

Answer 16

The risk that a bank pay it counterparties and fails to receive a payment in return

Question 17

Net FX settlement using continuous linked settlement (CLS)

Answer 17

• CLS: A cross-currency settlement system operated by CLS Bank
• Benefits:
- Payment vs. payment
- More certainty about end-of-day cash positions
- The volume and value of payments is reduced
- Errors are minimised
• Payments made through Bank of England via CHAPS

Question 18

CLS summary

Answer 18

0630 - members input settlement instructions to CLS bank before 0630 CET. At 0630 CET CLS provides the member with its NET payment schedule for that day.
0630-0700 CET - members submit their net payment totals to the relevant central bank.
0700-0900 - continuously receives funds from settlement members, settles instructions across its books and pays out funds to settlement members.
0900-1200 - payins and payouts are finalised.