Unit 6-Uniform Practice Flashcards
Regular Way Settlement
T+2 (just like stock)
Cash Settlement
Same Day
When Issued (WAII)
No earlier than 2 business days after the syndicate manager notifies clearing agent of established settlement date (used new issue is announced but has not started trading)
Settlement Rules
If a security is delivered before settlement, the buyer has the right to accept or reject
- Buyer must accept on settlement date
- Seller pays all delivery expenses and settlement occurs in the buyer’s office (rare today as most trades are settled by a clearing agent in book entry)
Dealer to Dealer Confirms
Submitted electronically by each party. Details are then compared by a centralized system, which then generates a confirm the following morning
-Paper confirms are extremely rare
When is confirm sent (in case of paper confirms)?
Regular Way: On trade date
Cash: Exchanged by telephone on trade date, followed by paper confirm
When Issued: Initial confirm is T+1, final confirm at least 3 days before settlement
NOTE: Initial confirm does not contain accrued interest, settlement date, or total dollar amount. Final confirm will
What is on Interdealer Confirm?
-Each party’s name, phone, and address
-Contra party info (who is buying from or selling to)
-Par value and any accrued interest
-Trade Date and Settlement Date
-Description and CUSIP
-Yield and Price
-Amount of concession (if any) per $1000
MSRB also requires:
-Identity of the executing broker and clearing agent
-Time of trade
NOTE: Only the dealer reports trades to retail customers. This is called a one-sided submission
Unrecognized Trades (DK)
-If dealer determines trade occurred, must phone contra firm and send written confirm within one business day
-If dealer determines trade did not occur, must phone contra firm an send rejection notice and any funds received within one business day
NOTE: If discrepancies remain, either party can void the transaction and seek rectification through arbitration
What happens when only one firm sends a confirm?
The confirming party must phone other party no earlier than 4 business days after trade date and no later than 8 business days after trade date. Any telephone call must be followed up with a “failure to confirm” notice within one business day.
Good Delivery
-All deliveries must have delivery ticket
-Bearer bonds must be delivered in increments of 1,000 or 5,000 par
-Registered bonds must be delivered in denominations of 1000 up to a max of 100,000
-Insured bonds must have proof of insurance enclosed
NOTE: Partial deliveries are NIGO and can be rejected
Mutilated Certificates
Cannot be accepted unless accompanied by a validation letter from:
- Transfer agent
- Paying agent
- Trustee
- Registrar
- Issuer
Delivery of Bearer Bonds
- All unpaid coupons must be attached
- If delivery is being made within 30 days of an interest payment, the seller can detach one coupon and submit a bank draft for one month’s interest by the payable date
Delivery of Called Bonds
-Partial Call: Seller must deliver a bond not subject to the call (unless buyer is okay)
-Whole Call: Seller must disclose to buyer that bond has been called
NOTE: Seller is not liable if call is announced after trade date but before settlement
Minimum Denominations
Typically, a BD cannot affect a transaction in a muni issue for anything lower than the lowest denomination of the issue
-Does not apply if BD buys position from client so long as it can determine client does not possess any bonds that would make the position above the minimum
-Allowed to sell position below minimum to another customer if the seller is liquidating the position
NOTE: If selling a partial position, the BD must submit in writing (either on confirm or separate) a disclosure that there may be liquidity issues with holding a position below minimum
Endorsing Paper Bonds (registered securities)
For good delivery, bonds must be endorsed (called assignment) in the exact name bonds are registered
-All signatures (or alterations) must be guaranteed by a commercial bank or NYSE memeber
Computing Accrued Interest
- Most bonds pay interest every 6 months based around the month and date of maturity
- When trading between interest payments, the buyer must reimburse the seller for any accrued interest (as the buyer will be receiving that interest in the next interest payment date)
- There will always be accrued interest UNLESS settlement date matches payment date
- Bonds trading flat (like zeros and bonds in default) do not trade with accrued interest
Long/Short coupon
Used to indicate slightly shorter of longer first coupon period (when bonds are newly issued)
Accrued Interest Period
Starting at (and including last pay date) and ending at the day before settlement NOTE: Accrued interest is calculated on a 30/360 basis
Accrued Interest Calculation
(Principal x Interest Rate x Elapsed Days)÷360
Interest Sent to Wrong Party After trade
- Person owed money must contact the person who received the interest
- Payment must be made to owed party within 10 business days of receiving notice (20 business days if claim received beyond 60 days of interest payment)
Reclamation
Describes process in which delivery in made, but is later discovered to be in bad order
-Accepting party must reach out to delivering party with delivery ticket and description of issue
Time Frames for Reclamation
-Missing coupon, mutilated certs, missing legal opinion or proof of insurance= 1 business day
-Bad interest payment check=3 business days
-Transfer agent refuses to accept delivery=18 months
-Missing, stolen, counterfeit certs, called bonds not disclosed=Unlimited
NOTE: Reclamation cannot be used to void a trade
Close Out Procedures
All agreed upon trades must be closed out (or cancelled) no later than 10 days after settlement
