Clearing and Settlement

Question 1

what happens at settlement

Answer 1

legal title transferred to buyer,
cash value of securities transferred to seller,
potential use of central securities depositary (eg Euroclear)

Question 2

what happens during pre-settlement and clearing

Answer 2

execution of trade,
matching of trade details,
confirmation of payment and delivery obligations,
potential use of clearing houses as central counterparty

Question 3

what is model 1 for settlement models

Answer 3

gross, simultaneous settlement of securities,

mostly used in europe

Question 4

what is model 2 for settlement models

Answer 4

gross settlement of securities followed by net settlement of funds,
net settlement of funds at end of processing cycle,
mostly in US and popular in emerging markets

Question 5

what is model 3 for settlement models

Answer 5

net simultaneous settlement of securities and funds

Question 6

what are the services of a custodian or depositary

Answer 6

safekeeping
-primary responsibility is ensure client assets segregated
administration:
-help delivery vs payment
-corporate actions
-link with registrars (arrange change of title)
-provide market information
-links with regulators (reporting requirements)

Question 7

what is crest

Answer 7

model 1 system in UK, also has reporting system so can complete regulatory reports for regulator

Question 8

what are the different types of custodian

Answer 8

global custodian,
sub-custody:
-local agent appointed to provide settlement and custody services for assets that a global custodian holds on behalf of clients in a foreign market (global custodian appoints sub-custody)
local custodian

Question 9

rehypothecation def

Answer 9

use of client’s collateral for own purposes

Question 10

what is the definition of bearer securities and registered securities

Answer 10

bearer: legal owner is the holder of the investment
registered: legal owner re corded on central register

Question 11

what does a nominee company do

Answer 11

nominee becomes legal owner,

investor is the beneficial owner

Question 12

what is the difference between a designated nominee account and a pooled nominee account

Answer 12

pooled: all investors grouped together
designated: investors all divided into named accounts, think investor can now go to meetings as proxy
designated more premium option

Question 13

what is a corporate nominee

Answer 13

offered through issuing company, issuer own the nominee company and provide a nominee service,
hybrid as investors pooled together but company also knows who all investors are

Question 14

what is Herstatt risk

Answer 14

risk that a bank pays its counterparties and fails to receive a payment in return (FX)

Question 15

what is continuous linked settlement

Answer 15

a CLS is a cross-currency settlement system operated by CLS bank,
to minimise Herstatt risk (counterparty FX risk)

Question 16

what is the benefit of CLS (continuous linked settlement) for FX

Answer 16

-payment vs payment
-more certainty about end-of-day cash positions (payment window tight)
-volume and value of payments is reduced
-errors are minimised,
payments made through Bank of England via CHAPS

Question 17

Special cum-bargains in equities are permitted:

AAll year BUp to the day before payment day CUp to books closed day DUp to three weeks, following the ex-div date

Answer 17

Up to the day before payment day

Question 18

A special ex-bargain allows an investor to:
ATrade ex-dividend where the buyer gains the right to the dividend BTrade off the order book but retain the services of a central counterparty CTrade a listed company on a dark pool platform to obtain a better price DTrade cum-dividend where the seller retains the right to the dividend

Answer 18

Trade cum-dividend where the seller retains the right to the dividend,

A special ex-bargain allows the investor to perform a trade in the cum-dividend period (where the buyer is entitled to the dividend), but strip the dividend from the share making it ex-dividend (out of dividend). Essentially, the seller keeps the rights to the next dividend and the buyer, having given-up this right, can buy the share more cheaply.

Question 19

What is the standard settlement period for cash settlement?

AT+0 BT+1 CT+2 DNo standard as it is determined by the contract specifications

Answer 19

T + 1,

The only time the examiner mentions cash settlement in their manual with regard to standard settlement periods is for the settlement of gilts in a dematerialsed form and not certificated which would be T+10. Foreign exchange spot is T+2, foreign exchange forwards are determined but the contract specifications and repo settles T+0.

Question 20

Through which system do German equities settle?

ADaxclear BEuronext CJASDEC DClearstream

Answer 20

Clearstream

Question 21

An investor is considering the most cost-effective way of registering his shares. Which of the following would BEST meet his objective?
AAn omnibus account BA designated nominee account CA sole nominee account DA segregated account

Answer 21

An omnibus account