Series 99 Trade Settlement & Clearance Procedures 3 — Questions and Answers
Question 1: What is a 'buy-in' procedure in securities settlement?
- A broker purchases additional shares for a customer's margin account
- A firm purchases securities in the open market to close out a counterparty's fail to deliver (Correct answer)
- A clearinghouse nets buy orders across multiple participants
- An investor exercises a call option to acquire shares
Correct answer: A firm purchases securities in the open market to close out a counterparty's fail to deliver
A buy-in allows the receiving party, after proper notice, to purchase securities in the open market and charge any additional cost to the failing counterparty.
Question 2: What does 'ex-dividend date' mean in the context of corporate actions and settlement?
- The date the company announces its dividend payment
- The first date on which a buyer of shares is NOT entitled to the declared dividend (Correct answer)
- The date the dividend is actually paid to shareholders
- The date the record books are closed to determine eligible shareholders
Correct answer: The first date on which a buyer of shares is NOT entitled to the declared dividend
On and after the ex-dividend date, purchasers of the stock will not receive the upcoming dividend; the seller retains that entitlement.
Question 3: Which of the following is a purpose of the Continuous Net Settlement (CNS) system operated by NSCC?
- To register broker-dealers with the SEC
- To net multilateral trade obligations daily and carry forward unresolved positions (Correct answer)
- To provide real-time gross settlement for government securities
- To audit broker-dealer financial statements quarterly
Correct answer: To net multilateral trade obligations daily and carry forward unresolved positions
CNS multilaterally nets all eligible equity transactions daily and rolls unsettled positions forward, reducing overall settlement fails and obligations.
Question 4: A trade is executed on Monday. Under the standard T+2 settlement cycle for U.S. equities, when does settlement typically occur (assuming no holidays)?
- Tuesday
- Wednesday (Correct answer)
- Thursday
- Friday
Correct answer: Wednesday
Under T+2, settlement occurs two business days after the trade date, so a Monday trade settles on Wednesday.
Question 5: What is the role of a 'correspondent clearing' arrangement?
- A large broker-dealer clears trades on behalf of smaller introducing broker-dealers (Correct answer)
- Two competing firms share a single trading platform
- A foreign broker accesses U.S. markets through the Federal Reserve
- A clearing firm borrows securities from the DTC lending pool
Correct answer: A large broker-dealer clears trades on behalf of smaller introducing broker-dealers
In a correspondent clearing arrangement, a carrying/clearing firm handles settlement, custody, and operational functions for an introducing broker-dealer's customer accounts.
Question 6: What is the significance of a CUSIP number in trade clearance?
- It identifies the broker-dealer executing the trade
- It is a unique identifier for a specific security used to ensure correct settlement (Correct answer)
- It specifies the settlement date for the transaction
- It tracks the credit rating assigned to a bond issuer
Correct answer: It is a unique identifier for a specific security used to ensure correct settlement
The CUSIP (Committee on Uniform Security Identification Procedures) number uniquely identifies a security, preventing settlement errors caused by confusion between similar instruments.
Question 7: Under FINRA Rule 11870, what must a member firm do when a customer requests transfer of a securities account to another firm?
- Deny the transfer until the customer resolves any open margin debits
- Complete the transfer within 3 business days of validation using ACATS (Correct answer)
- Charge a transfer fee and complete it within 30 calendar days
- Notify the SEC and wait for approval before transferring the account
Correct answer: Complete the transfer within 3 business days of validation using ACATS
FINRA Rule 11870 requires member firms to complete customer account transfers through ACATS within 3 business days after the transfer instruction is validated.
Series 99 Trade Settlement & Clearance Procedures 3
What is a 'buy-in' procedure in securities settlement?