Clearing and Settlement Flashcards
Stages of Settlement (3)
Pre-settlement and clearing as soon as trade has been executed
Settlement where legal title from seller to buyer is transferred
Post-settlement which entails the mngmnt of failed transactions
Levels of matching buyer and seller trade data (2)
Trading counterparties compare trade details either bilaterally (between each other) or electronically via a third party central matching facility
Custodians on behalf of buyer/seller will compare settlement instructions
The Clearing process (6)
Recording key trade info so counterparties can agree terms
Formalising legal obligation
Matching and conf trade details
Agreeing settlement procedures
Sending instructions to brokers, custodians etc
Making margin calls in relation to collateral paid against default
What is Settlement Method Model 1? (4)
All transfers made by book entry
Maintains both the security and funds accounts
Simultaneously settles individual securities, transfer instructions and associated fund transfers
Transfers are final and overdraft on securities accounts are prohibited
What is Settlement Method Model 2? (4)
Securities settled on a trade-for-trade (gross) basis throughout the processing cycle
Funds are settled on a net basis at the end of processing cycle
Maintains securities accounts but funds usually held by another entity e.g. commercial bank/central bank
Transfers made by book entry and overdrafts are allowed since delivery happens before payment
What is Settlement Method Model 3? (4)
Maintains securities accounts but funds usually held by another entity e.g. commercial bank/central bank
Securities settled on a simultaneous net basis
Book entry doesn’t happen until the end of the processing cycle
If a participant has insufficient funds to buy, there will be an opportunity given for them to gather the necessary funds
Primary responsibility of a custodian (3)
Ensure client’s assets are fully protected at all times
Segregate client’s assets from custodian’s assets
Provide robust safekeeping for all valuables and documentation
What is a global custodian? (3)
Provides investment admin for investor clients
Processes cross border securities trades
Keeps financial assets secure outside the country the investor is located in
What is a sub-custodian? (3)
Employed by a global custodian as its local agent to provide settlement and custody services
Serves as the eyes and ears for the global custodian in the local market
Lobbies market authorities for reform to make market more appealing for foreign investment
What is a local custodian? (3)
Agent banks which operate in their own local markets
Sometimes also offering global custody for institutional investors
Experts in their local markets
What is a regional custodian?
A custodian offering agent bank services across many different markets in a regio e.g. custody and clearing
Types of Nominee Company (3)
Pooled where individual clients grouped together
Designated where nominee name inc. unique identifiers for each client
Sole where single nominee is used for single client
What is dividend declared?
When a company announces its intention to pay dividend at a future date
What is record/books closed date? (2)
Date on which a copy of the shareholder’s register is taken
People on this list at the end of the day will be paid dividend
What is ex-dividend date?
Business day before the record date typically Thursday
