Series 99 Trade Settlement & Clearance Procedures 4 — Questions and Answers
Question 1: What is 'mark-to-market' in the context of futures and options settlement?
- Assigning a credit rating to a futures contract based on market conditions
- Daily revaluation of open positions with gains or losses credited or debited to margin accounts (Correct answer)
- Calculating the premium owed when an options contract is exercised
- Converting foreign currency positions to U.S. dollars at the end of each day
Correct answer: Daily revaluation of open positions with gains or losses credited or debited to margin accounts
Mark-to-market is the daily settlement process in which futures and options positions are revalued at closing prices and variation margin is collected or paid accordingly.
Question 2: Which of the following correctly describes 'book-entry' securities?
- Physical certificates held in a bank vault and transferred by courier
- Ownership recorded electronically without the issuance of physical certificates (Correct answer)
- Securities that can only be traded over-the-counter
- Bonds that pay interest only at maturity rather than periodically
Correct answer: Ownership recorded electronically without the issuance of physical certificates
Book-entry securities exist only as electronic records on the books of a depository or registrar, eliminating the risks and costs of handling physical certificates.
Question 3: What is the purpose of a 'margin call' in a securities account?
- To notify a customer their account has exceeded the maximum allowed equity
- To demand that a customer deposit additional funds or securities when equity falls below required maintenance levels (Correct answer)
- To inform a customer that their order has been filled at the market price
- To request documentation supporting a large cash deposit
Correct answer: To demand that a customer deposit additional funds or securities when equity falls below required maintenance levels
A margin call requires a customer to restore their account equity to at least the maintenance margin level after market losses have reduced it below that threshold.
Question 4: In options settlement, what happens when an equity option is exercised?
- The option expires worthless and premiums are refunded
- The OCC randomly assigns the exercise to a short option holder, who must deliver or purchase the underlying shares (Correct answer)
- The option is converted into a futures contract for delivery
- FINRA notifies the SEC within 24 hours of the exercise
Correct answer: The OCC randomly assigns the exercise to a short option holder, who must deliver or purchase the underlying shares
When an equity option is exercised, the Options Clearing Corporation (OCC) assigns the exercise notice to a short option holder, triggering the obligation to sell or buy the underlying stock.
Question 5: What is a 'receive versus payment' (RVP) transaction?
- The buyer receives securities and simultaneously releases payment through the DTC system (Correct answer)
- The seller receives payment before delivering securities
- A broker receives a commission without executing a trade
- A customer receives a margin loan without providing collateral
Correct answer: The buyer receives securities and simultaneously releases payment through the DTC system
RVP is the mirror of DVP: the receiving party accepts delivery of securities only upon simultaneous payment, ensuring neither side bears the other's credit risk.
Question 6: Under SEC Rule 15c3-3, what is the 'customer reserve' requirement?
- The amount of cash a broker must hold in a segregated account to cover customer credit balances and net receivables (Correct answer)
- The minimum net capital a broker-dealer must maintain at all times
- The percentage of a customer's account value that must be deposited as initial margin
- The maximum amount of securities a broker can lend to short sellers
Correct answer: The amount of cash a broker must hold in a segregated account to cover customer credit balances and net receivables
Rule 15c3-3 requires broker-dealers to maintain a special reserve bank account holding funds sufficient to protect customer free credit balances and net receivables from the firm.
Question 7: What is the primary difference between 'clearing' and 'settlement' in the trade lifecycle?
- Clearing involves the physical delivery of securities; settlement involves electronic confirmation
- Clearing is the process of reconciling and netting trade obligations; settlement is the final exchange of securities and funds (Correct answer)
- Clearing occurs after settlement to confirm trades were executed correctly
- Clearing is performed by the SEC; settlement is performed by FINRA
Correct answer: Clearing is the process of reconciling and netting trade obligations; settlement is the final exchange of securities and funds
Clearing encompasses the steps between trade execution and settlement (matching, netting, risk management), while settlement is the actual transfer of securities and cash that discharges the obligation.
Series 99 Trade Settlement & Clearance Procedures 4
What is 'mark-to-market' in the context of futures and options settlement?