Series 99 Trade Settlement & Clearance Procedures 2 — Questions and Answers
Question 1: What does the term 'fail to deliver' mean in the context of securities settlement?
- The buyer fails to send payment on settlement date
- The seller fails to deliver securities on settlement date (Correct answer)
- The clearinghouse fails to match trade details
- The broker fails to submit the trade for clearance
Correct answer: The seller fails to deliver securities on settlement date
A fail to deliver occurs when the selling party does not deliver the securities to the buyer by the settlement date.
Question 2: Which entity acts as the central counterparty (CCP) for most U.S. equity trades?
- Federal Reserve Bank of New York
- DTCC's National Securities Clearing Corporation (NSCC) (Correct answer)
- Securities Investor Protection Corporation (SIPC)
- Financial Industry Regulatory Authority (FINRA)
Correct answer: DTCC's National Securities Clearing Corporation (NSCC)
The NSCC, a subsidiary of DTCC, serves as the central counterparty for the vast majority of U.S. equity transactions, guaranteeing settlement.
Question 3: What is 'netting' in the clearance process?
- Charging fees on a per-trade basis
- Combining multiple buy and sell obligations to calculate a single net position (Correct answer)
- Verifying that trade confirmations match between counterparties
- Transferring physical certificates between custodian banks
Correct answer: Combining multiple buy and sell obligations to calculate a single net position
Netting aggregates all buy and sell obligations for a participant, reducing the number and value of securities and funds that must actually be exchanged.
Question 4: Under Regulation T, how many business days does a customer generally have to pay for a securities purchase in a cash account?
- 1 business day
- 2 business days (Correct answer)
- 3 business days
- 5 business days
Correct answer: 2 business days
Regulation T requires customers in a cash account to pay for securities purchases within 2 business days of the settlement date (effectively by T+2).
Question 5: What is the primary function of DTC (Depository Trust Company)?
- Matching buy and sell orders on stock exchanges
- Providing custody and book-entry settlement for securities (Correct answer)
- Setting margin requirements for broker-dealers
- Registering new securities offerings with the SEC
Correct answer: Providing custody and book-entry settlement for securities
DTC holds securities in immobilized or dematerialized form and facilitates book-entry transfers between participants, eliminating the need to move physical certificates.
Question 6: Which of the following best describes a 'delivery versus payment' (DVP) settlement?
- Securities are delivered before payment is received
- Payment is made before securities are delivered
- Securities and payment are exchanged simultaneously (Correct answer)
- Settlement occurs without any cash changing hands
Correct answer: Securities and payment are exchanged simultaneously
DVP is a settlement mechanism that requires the simultaneous exchange of securities and payment, eliminating principal risk.
Question 7: What information must be included in a trade confirmation sent to a customer?
- Only the security name and total amount due
- Security description, price, settlement date, capacity of the broker, and commissions or mark-up (Correct answer)
- Only the CUSIP number and trade date
- The broker's net capital position and margin balance
Correct answer: Security description, price, settlement date, capacity of the broker, and commissions or mark-up
FINRA and SEC rules require trade confirmations to include the security description, price, settlement date, broker capacity (agent or principal), and any commissions or mark-ups.
Series 99 Trade Settlement & Clearance Procedures 2
What does the term 'fail to deliver' mean in the context of securities settlement?