SCA Clearing, Settlement and Custody 1 — Questions and Answers
Question 1: What is the standard settlement cycle for equity securities traded on SCA-regulated UAE financial markets?
- T+1 (next business day)
- T+2 (two business days after trade date) (Correct answer)
- T+3 (three business days after trade date)
- Same-day settlement (T+0)
Correct answer: T+2 (two business days after trade date)
UAE equity markets follow a T+2 settlement cycle, meaning transactions settle two business days after the trade execution date.
Question 2: What is the primary purpose of a Central Counterparty (CCP) in UAE securities markets?
- To provide investment advice to institutional investors
- To interpose itself between buyer and seller, becoming the legal counterparty to both and eliminating bilateral counterparty risk (Correct answer)
- To set daily price limits for listed securities
- To issue new securities on behalf of listed companies
Correct answer: To interpose itself between buyer and seller, becoming the legal counterparty to both and eliminating bilateral counterparty risk
A CCP becomes the buyer to every seller and the seller to every buyer, guaranteeing trade settlement and eliminating bilateral counterparty risk from the market.
Question 3: What does 'Delivery versus Payment' (DvP) mean in the context of securities settlement?
- The buyer pays before receiving securities as a security measure
- Securities are transferred and cash is paid simultaneously, eliminating principal risk (Correct answer)
- Payment is made after securities are independently verified by a third party
- Securities are delivered without any payment requirement for approved counterparties
Correct answer: Securities are transferred and cash is paid simultaneously, eliminating principal risk
DvP ensures the irrevocable transfer of securities occurs simultaneously with the irrevocable transfer of funds, eliminating the risk that one party delivers without receiving the corresponding value.
Question 4: What is the primary function of a Central Securities Depository (CSD) in UAE capital markets?
- To provide margin loans to investors for purchasing securities
- To maintain the central register of securities ownership and facilitate settlement through book-entry transfers (Correct answer)
- To set interest rates for government bond issuances
- To regulate the conduct of licensed broker-dealers
Correct answer: To maintain the central register of securities ownership and facilitate settlement through book-entry transfers
A CSD maintains the official central register of securities ownership and enables settlement by recording transfers between accounts electronically without movement of physical certificates.
Question 5: In UAE securities markets, which of the following best describes a 'settlement fail'?
- A trade that is cancelled before reaching the exchange matching engine
- A situation where a party fails to deliver securities or funds on the agreed settlement date (Correct answer)
- A regulatory penalty imposed for late trade reporting to SCA
- An error detected in the trade confirmation message between counterparties
Correct answer: A situation where a party fails to deliver securities or funds on the agreed settlement date
A settlement fail occurs when either the seller fails to deliver the securities or the buyer fails to provide the required funds by the scheduled settlement date.
Question 6: What is the primary role of a custodian bank in UAE securities markets?
- To execute securities trades on behalf of investors on the exchange
- To safeguard clients' securities and cash, process corporate actions, and facilitate settlement (Correct answer)
- To provide credit ratings for securities issuers listed on DFM or ADX
- To determine the daily settlement prices of listed securities
Correct answer: To safeguard clients' securities and cash, process corporate actions, and facilitate settlement
Custodians safeguard clients' securities and cash assets, process corporate actions such as dividends and rights issues, and provide settlement and reporting services on behalf of their clients.
Question 7: What does 'dematerialization' of securities mean in the context of UAE capital markets?
- The cancellation of securities following a company's voluntary liquidation
- The conversion of physical share certificates into electronic book-entry records held at a CSD (Correct answer)
- The transfer of securities ownership from a domestic investor to a foreign investor
- The destruction of old paper certificates when a company performs a stock split
Correct answer: The conversion of physical share certificates into electronic book-entry records held at a CSD
Dematerialization converts physical securities certificates into electronic records maintained at the central securities depository, eliminating risks and costs associated with physical certificates.
SCA Clearing, Settlement and Custody 1
What is the standard settlement cycle for equity securities traded on SCA-regulated UAE financial markets?