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Series 53 > Unit 5-Operations and Trading > Flashcards

Unit 5-Operations and Trading Flashcards

1
Q

Regular Way Settlement

A

T+2

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2
Q

Cash Settlement

A

Same Day

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3
Q

When Issued/As/If

A

No earlier than 2 business days after notification of settlement date is provided to a clearing firm by the syndicate manager

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4
Q

General Settlement Rule

A
  • If security is delivered early, buyer may reject

- All delivery expenses are responsibility of seller and settlement takes place in buyer’s office

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5
Q

Interdealer Confirms

A

Submitted by both parties for virtually comparison by a clearing agency

  • The morning after submission, a confirm is sent to both parties electronically
  • Paper confirms are extremely rare
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6
Q

Settlement Rules for Securities Ineligible for Auto-Comparison (Paper confirm sent)

A

Regular Way: On trade date
Cash: Confirmed by phone on trade date, confirm sent next day (T+1)
When Issued: Initial confirm is sent T+1. Final confirm at least 3 business days before settlement

NOTE: If both parties agree, time and location of delivery may be adjusted
NOTE 2: For when-issued, initial confirm does not include accrued interest, dollar amount, or settlement date. These will be on final confirm

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7
Q

What is in a Dealer Confirm?

A
  • Confirming party’s name, address, phone
  • Contra Party info (who buying from/selling to)
  • Accrued Interest
  • Par
  • Description of Securities
  • CUSIP
  • Trade and Settlement Date
  • Yield or Price
  • Amount of concession (per $1000 bond basis)

MSRB also requires:

  • Name of executing BD
  • Name of Clearing firm
  • Time of trade
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8
Q

Dealer Trade Discrepancies Procedure

A

If error can be resolved: Erroring party sends a new confirm within 1 business day

Error cannot be resolved: Each party must submit DK notice

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9
Q

Procedure for DK Notice

A

Trade Occurred: Immediately phone confirming dealer and send written confirm within 1 business day

Trade Did Not Occur: Most immediately phone contra party and send written non-recognition notice and return receipt within 1 business day

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10
Q

Procedure-Contra Party Confirm not Received

A

Confirming firm must phone contra no earlier than T+4 and no later than T+8

  • Written “failure to confirm” must be sent 1 business day after phone call
  • The firm receiving “failure to confirm” must promptly confirm whether trade did/did not occur and send written confirm or non-recognition within 1 business day

NOTE: Either party may then void the transaction. Restitution may then go to arbitration

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11
Q

Good Delivery Rules

A
  • All deliveries must have delivery ticket indicating: denomination, par, and coupon rate
  • Bearer bonds must be in 1000 or 5000 increments
  • Registered bonds must be in increments of 1000 up to max $100,000
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12
Q

Mutilated/Damaged Certificates

A

Can only be accepted if accompanied by a validation latter from:

  • Transfer or Paying Agent
  • Trustee
  • Registrar
  • Issuer
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13
Q

Mutilated Coupons

A

Must have validation from issuer or commercial bank

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14
Q

Cancelled Coupons

A

Must be endorsed or guaranteed by issuer, officer of the issuer, designated agent of issuer, trustee, or paying agent.

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15
Q

Good Delivery Bearer Bonds

A
  • All unpaid coupons must be attached
  • If delivery is made within 30 days of the next coupon payment, seller may detach and deliver with a bank draft for one month’s interest payable no later than the next coupon date
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16
Q

Delivering Called Bonds

A

So long as call is disclosed at time of trade, delivery is good. If not disclosed at trade date follow these rules:

  • If partial call, seller must deliver uncalled bonds
  • If whole call, must be disclosed by trade date
  • Delivery is not good if call is not disclosed. However, if whole call is announces after trade date, seller has not option other than delivering called bonds
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17
Q

Bonds Below Minimum Denomination

A

All bonds must be transacted in the minimum denomination unless certain exceptions are made

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18
Q

Purchasing below min Denomination from Customer

A

Ok so long as existing position is below minimum and sale would liquidate entire position

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19
Q

Selling below min Denomination to Customer

A
  • Original position must have been below minimum
  • BD must send client a written notice stating that the trade is below min and may affect liquidity unless customer already holds existing bond position that would make sale within minimum denomination threshold
  • This disclosure may be on confirm or separate statement
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20
Q

Small Money Difference Matrix

A 
1,000 to 24,999               $10
25,000 to 99,999            $25
100,000 to 249,999         $60
$250,000 to $999,999   $250
$1,000,000 +                    $500

NOTE: Small money differences will not void good delivery, but significant differences may result in void

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21
Q

When must small money differences be rectified?

A

Within 10 business days of settlement

-Seller’s price prevails

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22
Q

Good Delivery (Legal Opinion)

A

All deliveries must be accompanied by legal opinion

-Those munis without legal opinion must be explicitly noted as “Ex-Legal” at the time of the trade

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23
Q

Good Delivery (Insured Bonds)

A

For bonds that are insured, a proof of insurance must be sent for good delivery

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24
Q

Endorsement/Assignement

A

For good delivery, all endorsements must be in the exact name of those listed on the cert
-All signatures (and any alterations) must then be guaranteed by a commercial bank or NYSE member

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25
Q

Computing Accrued Interest

A

The seller must pay the bond price along with any accrued interest at the time of trade

  • Window starts on last interest payment date through day before settlement
  • Most bonds pay interest every 6 months on the 1st or 15th

NOTE: If settlement occurs on the coupon date, no accrued interest is included in the sale
NOTE: 30 day month, 360 day year

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26
Q

Accrued Interest Schedule

A

J&J January 1 and July 1
M&N May 1 and Nov 1
F&A 15 Feb 15 and August 15
J&D 15 June 15 and December 15

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27
Q

Net Amount (accrued interest)

A

The first coupon after a secondary market trade

-The full coupon minus the accrued interest paid

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28
Q

Procedure for Interest Payment Claims

A

1) Party owed money must send written notice to party who received interest erroneously
2) Check for interest amount must be send within 10 business days of receipt of notice UNLESS
3) Claim is made more than 60 days after interest payment date-in which case check must be sent within 20 business days of notice receipt.

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29
Q

How are reclamation claims made?

A

Receiving BD must return securities along with delivery ticket and a description of the issue
-The BD receiving the notice must then promptly correct the issue and return the proper securities

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30
Q

Reclamation Period: Missing coupons, Mutilated certs/coupons, missing legal opinion, missing proof of insurance

A

1 business day

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31
Q

Dishonored Interest Check

A

3 business days

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32
Q

Irregular Delivery/Refusal by Transfer Agent

A

18 months

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33
Q

Missing/Stolen/Counterfeit Certs, Failure to disclose partial call or whole call not disclosed at time of trade

A

Unlimited

34
Q

When must agreed upon trades be closed out?

A

No later than 10 calendar days after settlement

35
Q

Intent to Closeout by Purchaser

A

1) Buyer must notify seller by sending a message through clearing firm that handled trade of intent to close out. This cannot be done until at earliest one business day after original settlement
2) The notice must stipulate a deadline by which time the securities must be delivered. This can be no earlier than 5:15PM of the 3rd business day following the day the notice was given. Buyer may (if they chose) wait to send notice up to 10th calendar day after original settlement

36
Q

Closeout by Purchaser (securities not delivered)

A

1) Buyer may “buy in” at market price and sent any expenses to seller
2) Buyer may accept from seller comparable securities (bond, yield, price) with all expenses going to seller
3) Require seller to purchase the securities at market and sell with any accrued interest and additional costs

37
Q

Retransmittal of Close Out Notice

A

A clearing firm may retransmit a sellout notice to a seller by 5:15PM the business day after receipt of the notice of the buyer

  • This will extend the delivery time period by 1 business day
  • The retransmitting firm must then follow up with the purchaser letting them know the notice was forwarded and that the terms have been extended by 1 business day
38
Q

Close Out by Seller

A
  • Sellout can be at current market price no sooner than 1 business day following intent to closeout is given to buyer
  • If the seller closes out, they must notify the buyer by phone and promptly send a confirm of the closeout transaction
  • Any money due or expenses to be borne must be forwarded to buyer within 5 business days of closeout execution

NOTE: The earliest a seller can close out is one business day after telephone notice

39
Q

Customer Order Ticket

A

At a minimum, the entering rep must include:

  • Account number
  • Any terms and conditions of the order
  • Solicited, Unsolicited, or Discretionary
  • Long or Short
  • Time of order entry and (if possible), the execution date and time

NOTE: If trade is entered by a POA, Partner, Corp Agent, or one party of a joint account, the name and address of person entering order must also be included

40
Q

Customer Confirms

A

See Word Doc

41
Q

When is yield not included on a customer confirm?

A
  • Reset Bonds
  • Bonds in Default
  • Bonds sold at par (coupon is sufficient)
42
Q

Customer Requests for Previously Executed Trades

A
  • If request is made within 30 days of trade, BD must respond within 5 business days of request
  • If more than 30 days from trade, BD must respond within 15 business days
43
Q

Prices to Customer (Principal Trade)

A
  • Best judgement of BD as to fair market value
  • Expenses of execution
  • Fact that BD is entitled to a profit
  • Total dollar amount of trade
44
Q

Prices to Customer (Agency Trade)

A
  • Availability of security
  • Expenses of Execution
  • Value of services by the BD
  • Amount of any other compensation to be received in connection with the trade
45
Q

Considerations Affecting Best Execution

A
  • Size and type of transaction
  • Market situation (price, liquidity, volatility)
  • Number of markets checked
  • Information used to determine current price
  • Accessibility of quotations
  • Any terms or conditions attached to the order
46
Q

Interpositioning

A

Placing a 3rd party between two BDs affecting a customer order
-Is a violation

NOTE: this rule is waived when customer is Sophisticated Municipal Market Professional (SMMP)

47
Q

Riskless Principal Transcation

A
  • Despite name, considered agency transaction
  • BD buys bonds for its inventory to fill a customer order in whole at a markup. There is no risk to the BD as there is no inventory left after trade is executed
48
Q

Disclosure Requirement (out of state 529s)

A

Before or at time of trade:

  • The laws of home state of owner or beneficiary may allow for certain tax benefits or other benefits not available with the purchase of an out of state 529
  • Potential home state benefits should be only one of numerous considerations when investing in a 529
  • The customer should consult with tax-expert, FA, or other advisor about potential benefits of choosing a in-state 529
49
Q

Non-Transferable Assets (TOA Rules)

A

If certain assets cannot be transferred, the receiving firm, the holding firm, or both must notify client in writing before TOA validation of options:

1) Liquidate
2) Keep at original firm
3) Transfer to client in physical form

50
Q

TOA Procedures

A

1) Client sends form G-26 to receiving firm
2) Receiving firm must immediately transfer instructions to holding firm
3) The holding firm, within 1 business day of TOA receipt, validate and return instructions to the receiving firm with a list of current positions (along with any exceptions taken to the TOA request)
4) Once validated, the holding firm must freeze the account, cancelling any open order and refusing any new ones

NOTE: If no market data available, holding firm must use purchase cost. If no CUSIP is available, holding firm must send a detailed description of securities

51
Q

Reason For TOA Exception

A
  • No record of account
  • Instructions are incomplete
  • Improper signature
  • Additional Docs Needed (death, marriage cert)
  • Account is flat
  • Account number is invalid
  • Request is a dupe
  • Client has submitted written request cancelling TOA
52
Q

Customer Complaints

A
  • Submitted in writing by a customer or by an individual acting on customer’s behalf
  • Must be promptly given Investor Brochure detailing methods by which disputes may be resolved
  • All complaint resolutions must be signed off by a 53 or 9/10
53
Q

How long must customer complaints be held (MSRB)

A

6 years

54
Q

Bona Fide Quotes

A
  • Applies to all quotes sent by any form of communication
  • Must reflect BDs best judgement as to fair market value as of the time of the quote
  • The quote need not only fair market value, but also may take into consideration:
    • Overall inventory position
    • Inventory of the particular security
    • Judgement regarding potential price movement

NOTE: All quoted are firm unless otherwise stated
NOTE 2: If quote was obtained form a print ad, it is the responsibility of the customer to request current price

55
Q

Quoting Securities not in Inventory

A

Allowed so long as BD is prepared to buy/sell security at quoted price

NOTE: Firms cannot quote securities for which it knows there is no market in the secondary

56
Q

Nominal Quote

A

A non-firm quote for informational purposes only

-Must be disclosed as nominal

57
Q

Subject Quote

A

A quote subject to some other condition(s)

58
Q

Trade Reporting

A

-Must be done promptly for transparency purposes
-All BDs must obtain a Market Participant ID (MPID) from FINRA and submit reports through Form RTRS
NOTE: While BDs may use a 3rd party for trade reporting, the BD itself is ultimately responsible

59
Q

Reporting Trades to RTRS

A
  • Hours of operation are 7:30AM to 6:30PM M-F

- All trades effected in the business day must be reported within 15 minutes

60
Q

Exceptions to Trade Reporting

A
  • Trades by syndicate members on first day of trading that occur before 6:30PM must be reported by 8PM
  • Syndicate trades made after 6:30 must be reported within 15 minutes of the next RTRS session
  • Trades in securities maturing in 9 months or less (CP, Variable rate bonds, etc.) must be reported by close of RTRS session on date of execution

NOTE: Typically, each party reports trade. For syndicate trades, the seller is the one who reports

61
Q

Trades Exempt from RTRS Reporting

A
  • Munis with no CUSIP
  • Muni Fund Transactions
  • Transactions between dealers that are not interdealer eligible for comparison by a clearing agency registered with the SEC
62
Q

Weighted Average Price

A

Used by traders trying to fill a larger order
-Quote is based on multiple trades throughout the day

NOTE: EMMA and Bloomberg often quote large, round lot transactions. For smaller trades or odd lots, other munis of similar characteristics should be evaluated to arrive at a price. May also look at munis from same state

63
Q

Reciprocal Dealing

A
  • A muni BD cannot solicit Investment Company business in exchange for sale of investment company shares
  • A investment company cannot direct orders to a muni BD as compensation for the muni BD selling a large number of its shares

All transactions must be done in the customer’s best interest

64
Q

Time of Trade Disclosures

A

Must be made orally or in writing at or prior to trade

  • Whether trade is recommended or unsolicited
  • Primary or secondary transaction
  • All material information relevant to the purchase:
    • is the issue insured (and credit rating of insurer)
    • are there negative credit issues
    • are there liquidity enhancements

NOTE: A rep is not exempt from disclosing these matters by simply pointing the client to EMMA/Bloomberg

65
Q

Trade Disclosures for SMMPs

A

If the BD reasonably believes the client is a SMMP:

  • No suitability analysis required
  • No requirement to disclose material facts
  • No obligation to ensure fair and reasonable price if the trade(s):
    • Are non-recommended secondary agency trades
    • The BD is not exercising discretion
    • The BDs services are limited to providing anonymity, communication, order matching, or clearing functions

NOTE: The underlying principle is that an SMMP knows the market and has access to relevant market data

66
Q

Definition of SMMP

A

Very similar to institutional client;

  • Bank or S&L
  • Insurance Company
  • Investment Company
  • Investment Advisor
  • Any entity (including people) with $50+ million
67
Q

Dissemination of an SMMP quote

A

If a BD disseminates a quote for a SMMP, the quote must be bona fide.

NOTE: Nominal quotes are still allowed so long as they are designated as such

68
Q

Sophisticated Investor Letter (Big Boy)

A

Signed by the sophisticated investor to indicate understanding of risks.
-May also include info regarding net worth, sophistication level, access to market information

NOTE: These letters are often required by underwriters for riskier than usual issues

69
Q

Securities Information Center (SIC)

A

Rule 17f-1

-The central repository for info regarding missing, stolen, and counterfeit securities

70
Q

Reporting Missing Securities Procedure (Form X-17F-1A)

A
  • If missing (but no criminality suspected), the BD has 2 business days to locate the securities. If still missing on the 3rd day, it must be reported to the SIC and transfer agent
  • If criminality is suspected, the BD has 1 business day to report to the SIC and FBI

NOTE: If the suspected stolen securities are later recovered, the BD has 1 business day to notify the SIC, FBI, and any other party that may have been notified

71
Q

Incoming Securities Inquiries

A

Every BD must inquire the SIC about new securities coming into custody. Exceptions are:

  • Received directly from issuer
  • Received by another member firm
  • Part of transaction worth $10K or less
  • Is received from an existing customer of the BD AND:
    • Is registered in the customer’s name
    • Was previously sold to the customer per the BD’s existing records

NOTE: Essentially, inquiry is only required when a new customer brings in registered or bearer securities, or from an existing customer in bearer form
NOTE 2: Though not always required, any BD may inquire about the validity of new securities that come into custody at any time

72
Q

Fidelity Bonding

A

Designed to protect the firm from employee malpractice such as forgery, theft, embezzlement, and fraudulent trading

73
Q

Fidelity Bonding Levels

A
  • For firms with 250K or less in net cap requirements, the minimum coverage is 120% of net cap requirement OR $100,000 (whichever is greater)
  • For firms with $250+ net cap requirement: see table on page 196

NOTE: Firms must review their bonding coverage annually and notify FINRA if coverage is modified, cancelled, or terminated
NOTE 2: Bank dealers are exempt from fidelity bonding as they are already subject to banking laws regarding insurance coverage

74
Q

Net Capital (basic)

A

Essentially the LNW of a firm:

Net Cap=Liquid Assets-Total Liabilities

The calculation discounts illiquid assets. In theory, net cap is what would remain in a BD liquidation once all assets are sold and debt paid

75
Q

Record Retention

A

See Word doc and make flash cards

-Make sure subsidiary records on pg. 200 are included

76
Q

Access to BD Records

A

All records must be kept in readily available form for 2 years. After 2 years, record access must be reasonable.

  • All records must be viewable and have printout options
  • Electronic and magnetic records must be kept in triplicate
77
Q

Put Options

A

A written or verbal agreement allowing the holder to put securities back at a specified price and date in the future

78
Q

How long are repurchase agreement records held for?

A

4 years and must include:

  • Full description of the securities
  • Aggregate Par
  • Description on the terms and conditions of agreement
79
Q

Parking Securities

A

Bananas illegal
-Placing securities within a customer’s account as a means by which to conceal true ownership and where the customer does not bear financial responsibility or liability

80
Q

Order Memoranda

A

All records of transactions conducted by the BD must be retained for 4 years:
-Principal and agency transactions must be segregated

NOTE: Records can be on a trade date or settlement date basis. However, the method must be uniform

81
Q

Contents of Agency Transaction Memo

A
  • Account number and customer ID
  • Order entry date and time
  • Execution price, date, and time
  • Any order conditions (limits, not held, etc.)
  • If discretionary trade, name of applicable POA, agent, etc.

NOTE: These are the same rules for principle transactions. However, principle transactions may not be able to provide exact time of execution

Series 53 (5 decks)

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