Clearing and settlement

Question 1

All securities settle T + 2 except:

Answer 1

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

Question 2

Organising delivery vs. payment models

Answer 2

• Model 1 – 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
• Model 2 – 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
• Model 3 – 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 3

Custodian services:

Answer 3

• 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 4

Types of custodian:

Answer 4

• 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 5

Bearer vs registered

Answer 5

• Bearer securities
- Legal owner is the holder of the investment
• Registered securities
- Legal owner recorded on a central register

Question 6

Nominee accounts

Answer 6

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 7

Gross FX settlement and Herstatt risk

Answer 7

• Gross settlement: The entire value of each deal is paid to the other party
• Herstatt risk: The risk that a bank pays its counterparties and fails to receive a payment in return

Question 8

Net FX settlement using continuous linked settlement (CLS)

Answer 8

• 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