Series 7 STC Settlement & Regulatory Reporting (Ch. 19) Flashcards
To ensure that time stamps for reportable events are accurate, the Consolidated Audit Trail (CAT) system requires business clocks to be synchronized to within:
10 milliseconds of the atomic clock of the NIST
10 seconds of the atomic clock of the NIST
50 milliseconds of the atomic clock of the NIST
One minute of the atomic clock of the NIST
50 milliseconds of the atomic clock of the NIST
To ensure that time stamps for reportable events are accurate, the Consolidated Audit Trail (CAT) system requires business clocks to be synchronized to within 50 milliseconds tolerance of the time maintained by the atomic clock of the National Institute of Standards and Technology (NIST).
A corporation’s board of directors declared a dividend and set a record date of Wednesday, October 19. If an investor wants to acquire the stock and be entitled to the dividend, what’s the latest date on which the investor could purchase the stock?
On Monday, October 17, if using regular-way settlement, or, on Wednesday, October 19, if using cash settlement.
On Wednesday, October 19, regardless of whether regular-way settlement or cash settlement is used.
On Tuesday, October 18, if using regular-way settlement, or, on Wednesday, October 19, if using cash settlement.
On Wednesday, October 19, if using regular-way settlement, or, on Thursday, October 20, if using cash settlement.
On Tuesday, October 18, if using regular-way settlement, or, on Wednesday, October 19, if using cash settlement.
In this question, for a purchaser to be entitled to the dividend, he must be the owner of record by no later than Wednesday, October 19. Since it takes one business day for a regular-way trade to settle, the ex-dividend date is the same as the record date (i.e., Wednesday, October 19). Assuming regular-way settlement, any investor who purchases the stock on or after Wednesday, October 19, will not be entitled to the dividend since the trade will settle after the record date. Therefore, with a regular-way settlement, the latest date on which an investor can purchase the stock and be entitled to the dividend is Tuesday, October 18. With cash settlement, the trade will settle on the same day as the trade. Based on cash settlement, the latest date on which an investor can purchase the stock and be entitled to the dividend is actually the record date of Wednesday, October 19.
All of the following transactions are exempt from the reporting requirements of the MSRB’s Real-Time Transaction Reporting System (RTRS), EXCEPT:
Transactions involving securities without CUSIP numbers
Transactions in municipal fund securities
Inter-dealer transactions that are not eligible for comparison in a registered clearing agency
Transactions involving municipal securities
Transactions involving municipal securities
The RTRS requires the reporting of transactions involving municipal securities. However, transactions involving securities without CUSIP numbers, transactions involving municipal fund securities, and inter-dealer transactions that are not eligible for comparison in a registered clearing agency.
For what reason is a due bill sent?
A registered representative has failed to pay her registration fees.
An investor buys stock before the ex-date and is therefore entitled to the dividend, but the seller delivers the security after the record date.
A firm has an order-flow arrangement with another firm and owes additional funds.
FINRA has imposed a fine on a registered representative.
An investor buys stock before the ex-date and is therefore entitled to the dividend, but the seller delivers the security after the record date.
A due bill is sent when a stock purchaser is entitled to a declared dividend based on his trade being executed prior to the ex-dividend date, but the seller failed to deliver the securities by the record date.
If a customer purchases Treasury notes in his brokerage cash account, which of the following statements is TRUE regarding the settlement of, and payment for, the transaction?
The transaction settles on the second business day after the trade date and payment is generally also required by the second business day after the trade date.
The transaction settles on the next business day after the trade date and payment is generally also required by the next business day after the trade date.
Both the settlement of, and payment for, the transaction are required by the fourth business day after the trade date.
The transaction settles on the next business day after the trade date and payment is required on the second business day after the settlement date.
The transaction settles on the next business day after the trade date and payment is generally also required by the next business day after the trade date.
Transactions involving government securities settle on the next business day following the trade date (i.e., T + 1). However, the FRB’s Regulation T guidelines regarding the payment date don’t apply to transactions involving government securities. For that reason, the payment date for a government securities transaction is generally also the next business day following the trade date. The fact that the purchase is made in a cash account means that the customer must fully pay for the securities (i.e., no loan will be provided for the purchase).
Government securities, even if in a cash account, settle T + ____. Payment is also required T + ____
T+1 ; T+1
If an investor purchases 300 shares of stock and is receiving physical certificates, which of the following is NOT considered good delivery?
One certificate representing 300 shares
Six certificates each representing 50 shares
Three certificates each representing 100 shares
Four certificates each representing 75 shares
Four certificates each representing 75 shares (75 x 4 doesn’t add up to multiples of 100 shares)
If stock is being delivered in physical certificates, Delivery must be made in 100-share certificates, multiples of 100, or any combination that adds up to 100 shares. Delivery of six certificates of fifty shares is acceptable; however, delivery of four 75-share certificates is not, since 75-share certificates cannot be combined to add up to 100 shares.
An investor purchased an XYZ June 40 call at 3. Moments before the expiration of the call, XYZ is trading at $40.53. In this case, what happens to the option?
It expires worthless.
It’s automatically exercised.
Its expiration is extended for two more months.
It’s split into two separate contracts.
It’s automatically exercised.
Any options that are in-the-money by at least $0.01 are automatically exercised (unless contrary instructions are provided by the owner). Remember, a call is in-the-money if the market price of the underlying stock is up above the strike price. Since the stock is trading at a price above $40, the option is in-the-money.
Transactions involving Nasdaq-listed and other exchange-listed securities that occur in the over-the-counter market are reported to the:
Trade Reporting Facility (TRF)
Over-the-Counter Reporting Facility (ORF)
Trade Reporting and Compliance Engine (TRACE)
Real-Time Transaction Reporting System (RTRS)
Trade Reporting Facility (TRF)
Transactions involving Nasdaq-listed and other exchange-listed securities that occur in the over-the-counter market are reported to the Trade Reporting Facility. However, the ORF is used to report transactions exclusively in OTC securities that don’t trade on Nasdaq or other exchange markets.
T/F. The ORF (Over-the-Counter Reporting Facility) is used to report transactions exclusively in OTC securities that don’t trade on Nasdaq or other exchange markets.
True
On Wednesday, May 24, an investor purchased 1,000 shares of an NYSE-listed stock using cash settlement. When will the trade settle?
Wednesday, May 24
Thursday, May 25
Friday, May 26
Monday, May 29
Wednesday, May 24
A trade using cash settlement will settle on the same day that the trade is executed. In this case, Wednesday, May 24, is both the trade and settlement date.
On Monday May 1, XYZ Corporation declared a $0.25 dividend. XYZ’s board of directors specified the record date as Friday, June 9 and the payment date as Monday, July 10. By what date must an investor own the stock to be entitled to the dividend?
Monday, May 1
Friday, June 9
Monday, July 10
Thursday, June 8
Friday, June 9
ABC Company is raising additional capital through a rights offering. The company sets the record date as Tuesday, March 8, and the payable date as Tuesday, March 22. Assuming regular-way settlement, if an investor wants to purchase the company’s stock with rights attached, he must:
Purchase the stock on Tuesday, March 8
Purchase the stock on or before Monday, March 7
Purchase the stock on Monday, March 21
Purchase the stock on Tuesday, March 17
Purchase the stock on or before Monday, March 7
To be entitled to the rights, an investor must own the stock on or before the record date of Tuesday, March 8. Since a regular-way transaction takes one business day to settle, the investor must purchase the stock on Monday, March 7 to be the owner by Tuesday, March 8. Please note, this situation is identical to an investor who wants to purchase stock to be entitled to a dividend.
On Wednesday, July 3, an investor purchased 1,000 shares of an unlisted OTC equity security in her cash account. When will the trade settle?
On Wednesday, July 3
On Thursday, July 4
On Monday, July 8
On Friday, July 5
On Friday, July 5 (July 4 is not a business day [holiday], so it will settle T+1, which would be Friday
Transactions involving equity securities that occur in either cash or margin accounts settle one business day following the trade date (i.e., regular-way). In this case, the first business day following the trade date is actually Friday, July 5 since July 4 is not a business day. If a question references a cash trade, a cash transaction, or a trade settling for cash, it means that the trade will settle on the same day as the trade.
On Monday May 1, XYZ Corporation declared a $0.25 dividend. XYZ’s board of directors specified the record date as Friday, June 9, and the payment date as Monday, July 10. If an investor wants to acquire the stock, but does not want to pay a price that includes the dividend, what is the earliest date that the purchase can be made?
Monday, May 1
Thursday, June 8
Monday, June 12
Friday, June 9
Friday, June 9
If the investor wants to acquire the stock, but doesn’t want to pay a price that includes the dividend, the purchase should be made on or after the ex-dividend date of Friday, June 9. Since a stock trade takes one business day to settle (assuming regular-way settlement), if an investor purchases the stock on the record date, he will not be the owner until Monday, June 12. XYZ Corporation will pay the dividend only to investors whose names are listed as the owners on the record date of Friday, June 9.
If an investor is selling securities (either stocks or bonds) in physical form, what process could be used to safeguard the delivery of the securities?
Send the unsigned certificates in one envelope, and send a signed stock or bond power in a separate envelope
Obtain a legal opinion from a financial institution
Use a messenger service and hope for the best
Seek assurance of safe delivery from the SEC
Send the unsigned certificates in one envelope, and send a signed stock or bond power in a separate envelope
To safeguard the delivery of physical securities, a customer could send the unsigned certificates in one envelope, and then send a signed bond (or stock) power in a separate envelope. By doing this, if the certificate were to fall into unauthorized hands, it would have no value since it would not be negotiable.
An investor owns 100 shares of ABC stock. Later, on Monday, October 19, the investor buys 1 ABC May 60 put for 4 to hedge the stock position. When is the settlement of the option purchase?
On Monday, October 19
On Tuesday, October 20
On Wednesday, October 21
On Thursday, October 22
On Tuesday, October 20
Option transactions (i.e., the purchase or sale of an option) settle on the next business day (T+1). Therefore, if the put is purchased on Monday, October 19, the trade will settle on Tuesday, October 20. If an option is subsequently exercised, the resulting stock transaction will also settle in one business day.
An investor buys T-bonds in the secondary market. When does the transaction settle?
On the same day as the purchase
Next business day after the trade date (T + 1)
Two business days after the trade date (T + 2)
Four business days after the trade date (T + 4)
Next business day after the trade date (T + 1)
Secondary market transactions involving U.S. government bonds, notes, and bills settle one business day after the trade date (i.e., T + 1).
According to Regulation T, which of the following statements is TRUE of the required payment date for transactions?
Customers must pay on the trade date.
Customers must pay by the settlement date.
Customers must pay by the first business day after the settlement date (i.e., S + 1).
Customers must pay by the second business day after the settlement date (i.e., S + 2).
Customers must pay by the second business day after the settlement date (i.e., S + 2). i.e., (T+3)
For this question, it’s important to distinguish between settlement and payment. The settlement for stock trades occurs one business day after the trade date (i.e., T + 1). However, Regulation T requires payments for trades to be made by no later than two business days after settlement (i.e., S + 2). Put another way, since it takes one business day for a trade to settle, customer payment must be made by no later than the trade date plus three business days (i.e., T + 3).
A company declared a dividend and set the record date as Wednesday, August 8. An investor wants the dividend income and buys the stock on Monday, August 6. If the seller fails to deliver the stock by the record date, what must be delivered to the buyer?
A promissory note
A cash management bill
A T-bill
A due bill
A due bill
Since the trade was executed prior to the ex-dividend date of Wednesday, August 8, the buyer is entitled to the dividend. However, if the seller fails to deliver the securities by the record date and the trade doesn’t settle as it should, the seller will still be the shareholder of record for the dividend payment. Therefore, good delivery rules require a due bill to accompany the stock to signify that the seller will deliver the dividend payment to the buyer once it’s received.
Details regarding the life of an equity order, from entry to execution, whether it was modified or cancelled, and whether it was executed are provided by which of the following?
CAT
TRF
ORF
TRACE
CAT (consolidated audit trail)
T/F. The Consolidated Audit Trail (CAT) System is a central repository that receives, consolidates, and retains the data over the lifecycle of trades and orders for all eligible securities, including listed equity securities and listed options.
True
T/F. The Trade Reporting Facility (TRF) is used for the reporting of trades involving listed securities that are executed over-the-counter.
True
T/F. The Over-the-Counter Reporting Facility (ORF) is used for the reporting of transactions involving OTC securities that don’t trade on Nasdaq or other exchange markets
True
T/F. The Trade Reporting and Compliance Engine (TRACE) is a system that provides greater transparency in the corporate bond market.
True
_____ is a central repository that receives, consolidates, and retains the data over the lifecycle of trades and orders for all eligible securities, including listed equity securities and listed options.
Consolidated Audit Trail (CAT)
________ is used for the reporting of transactions involving OTC securities that don’t trade on Nasdaq or other exchange markets
Over-the-Counter Reporting Facility (ORF)
_______ is used for the reporting of trades involving listed securities that are executed over-the-counter.
Trade Reporting Facility (TRF)
_________ is a system that provides greater transparency in the corporate bond market.
The Trade Reporting and Compliance Engine (TRACE)
Securities that have a restrictive legend (i.e., restricted securities) cannot be sold unless the legend is removed. The exclusive authority to remove the legend is given to:
The buying broker-dealer
The selling broker-dealer
The transfer agent
A custodian bank
The transfer agent
Securities that have a restrictive legend are considered restricted securities and cannot be sold unless the legend is removed. Only the transfer agent has the authority to remove a restrictive legend.
