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FCA 1: Securities > Clearing and Settlement > Flashcards

Clearing and Settlement Flashcards

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SIE Exam flashcards
1
Q

what are the 3 phases described as clearing and settlement?

A
  • pre-settlement and clearing
  • settlement
  • post-settlement
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2
Q

how is matching trade data completed?

A

matching trading counterparties details, custodians acting on behalf of the counterparties will compare settlement instructions

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3
Q

what is the definition of clearing?

A

obligations held by the buyer and seller to a trade are defined and legally formalised

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4
Q

what does the clearing process include?

A
  • recording key information
  • formalising the legal obligations
  • matching and confirming details
  • agreeing procedures
  • calculating settlement obligations
  • managing margin and making margin calls
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5
Q

how can trades be settled?

A

cleared bilaterally between trading parties or via a CCP that interposes itself between buyer and seller

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6
Q

what are two further basic elements to the settlement of trades?

A
  • timing of settlement
  • structure of settlement system
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7
Q

what is DvP?

A

Delivery versus payment- only making delivery of securities when the payment is certain

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8
Q

what are the three (BIS) models for DvP?

A

Model 1- transfer of securities occurs at the same time as the final transfer of funds. Primarily used in Europe e.g., CREST in the UK

Model 2- settles securities transfer on a gross basis, with the final transfer of securities taking place throughout the processing cycle- final transfer of funds at the end of the cycle.- predominantly used in the US

Model 3- final transfer of both securities and funds occur at the end of the processing cycle

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9
Q

what is the primary responsibility of a custodian?

A

ensure that the clients assets are fully protected at all times, provide robust safekeeping facilities for all the client’s physical and digital assets

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10
Q

what are the services provided by custodians?

A
  • safekeeping of assets
  • maintaining inventory
  • making arrangements for delivery and payment of cash
  • ensuring securities are registered
  • providing market information
  • managing the clients cash flows
  • monitoring and managing entitlements
  • managing tax services
  • ensuring reporting obligations
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11
Q

what are the different types of custody arrangements?

A
  • local custodians in each market
  • global custodian across the full range
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12
Q

what is the role of a sub-custodian?

A

employed by a global custodian as its local agent to provide settlement and custody services for assets that it holds on behalf of investor clients in a foreign market

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13
Q

what are bearer shares?

A

shares that aren’t registered, any person who physically has the share certificate is able to benefit from their monetary value

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14
Q

what is the role of a nominee in a registered title?

A

takes the registered title and all responsibilities around admin

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15
Q

what is the role of a nominee shareholder?

A

will hold the shares in a trust for the beneficial owners, they’re identified on the register of shareholders. appointed by a custodian

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16
Q

what are the different types of nominee companies?

A

pooled- individual clients are grouped together with a single nominee registration- no visibility within the company

designated- nominee name includes unique identifiers for each individual client

single- single nominee name used for specific client- underlying investor requires dividends to be mandated

17
Q

what does cum-dividend mean?

A

‘with the dividend’ , buyers of the shares have the right to the next dividend paid by the company

18
Q

what is the role of a corporate nominee?

A

when the issuing company itself provides a facility for its smaller shareholders to hold their shares within a single nominee

19
Q

what is the sequence of events leading up to a dividend payment?

A
  1. dividend declared
  2. record or books close date
  3. ex-dividend date
  4. dividend paid
  5. ex-dividend period
20
Q

what is the period where shares are traded cum-dividend?

A

at all times other than during the ex-dividend periods

21
Q

what is CLS?

A

Continuous linked settlement- process by which most of the world’s largest banks manage FX settlement among themselves. managed by CLS Group Holdings LTD and regulated by The Fed. settlement members pay in the net funds that are due to settle in each currency to their central bank

22
Q

what time period is CLS focused in?

A

5-hour window each business day from 7am to 12pm in the central European time

23
Q

what is DLT?

A

Distributed ledger technology- replacement of one centralised ledger of transactions with a decentralised network of computers all holding exact copies of the same ledgers. any changes have to be done by consensus

24
Q

what are the advantages of DLT?

A
  • trustworthy and reliable
  • prevents a single point of failure
  • very difficult to hack
  • removes costs and delays associated with single ledger
25
Q

what is stock borrowing?

A

temporary transfer of securities by a tender to a borrower with the agreement that the securities or equivalent (must be fungible) will be returned at a pre-agreed time

26
Q

what are the main two motivations behind stock borrowing?

A

securities driven and cash driven

27
Q

what governs the terms of a securities loan?

A

securities lending agreement, requires that the borrower provides the lender with collateral

28
Q

what are the benefits of stock lending?

A
  • borrowers avoid the costs and penalties associated with settlement failure
  • increases liquidity
  • collateral is provided
  • can support various strategies
  • allows investors to earn income on their securities
  • facilitates hedging and arbitraging of price differentials
29
Q

what are the risks of stock lending?

A
  • can aid market manipulation through short-selling
  • counterparty risk
30
Q

what is the haircut in a stock loan?

A

when the collateral that is provided typically exceeds the market value of the borrowed assets by an agreed percentage- protects the lender from adverse price movements

31
Q

what are SBLIs?

A

Stock borrowing and lending intermediaries, provide a service in separating out the underlying owners of securities from borrowers- will split the revenue from the loan with the lender. custodian banks can also act in the capacity

32
Q

what are the legal requirements as to why a stock loan can be performed?

A
  • settlement
  • delivery
    -facilitate another stock loan
33
Q

what is a manufactured dividend?

A

when the advantages of holding a security in a stock loan e.g., dividend must passed back to the lender

34
Q

what can a lender do if they want to exercise the right to vote during a stock loan agreement?

A

recall the loan in good time so that a proxy voting form can be completed and returned to the regulator

35
Q

what is the GMSLA?

A

Global master stock lending agreement, market standard for securities lending

36
Q

what are the main differences between a stock loan and a repo agreement?

A
  • stock lender charges a fee to the borrower, whereas in a repo the counterparty receives a rate of interest
  • repo agreement is used as a method of borrowing (of funds in exchange for securities) at a cheaper rate than on an unsecured bases
37
Q

what is a margin call?

A

when the collateral’s value in a repo transaction will be reassessed on a daily basis throughout the repo based on market rates- the borrower must ensure the value of the collateral remains aligned to the cash sum borrowed against their securities

38
Q

why would a collateral-taker (lender of cash in a repo) be more willing to accept lower-quality collateral?

A
  • typically yield a better return
  • top-grade collateral is in short-supply
39
Q
A

FCA 1: Securities (7 decks)

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