Series 99 Trade Settlement & Clearance Procedures 5 — Questions and Answers
Question 1: What is a 'depository participant' in the context of DTC?
- An individual investor who holds shares in street name
- A broker-dealer or bank that is a member of DTC and can access its book-entry settlement services (Correct answer)
- A company whose shares are eligible for electronic settlement
- An SEC-registered clearing agency that competes with DTC
Correct answer: A broker-dealer or bank that is a member of DTC and can access its book-entry settlement services
A DTC participant is a member firm (typically a broker-dealer or bank) that has direct access to DTC's custody and book-entry settlement services.
Question 2: Which regulation governs the time frame for broker-dealers to transmit payments to customers for securities sales proceeds?
- SEC Rule 10b-5
- SEC Rule 15c3-3 (the Customer Protection Rule) (Correct answer)
- FINRA Rule 4370
- SEC Regulation SHO
Correct answer: SEC Rule 15c3-3 (the Customer Protection Rule)
SEC Rule 15c3-3 imposes obligations on broker-dealers to promptly pay customers proceeds from securities sales and to safeguard customer funds.
Question 3: What is 'Regulation SHO' primarily designed to address?
- Insider trading in connection with tender offers
- Abusive naked short selling and persistent fails to deliver (Correct answer)
- Margin requirements for short sales of equity securities
- Disclosure requirements for short interest in publicly traded companies
Correct answer: Abusive naked short selling and persistent fails to deliver
Regulation SHO establishes rules on short sales to curb abusive naked short selling and requires broker-dealers to close out fail-to-deliver positions within specified timeframes.
Question 4: What is the 'settlement cycle' for U.S. Treasury securities?
- Same day (T+0)
- T+1 (next business day) (Correct answer)
- T+2 (two business days)
- T+3 (three business days)
Correct answer: T+1 (next business day)
U.S. Treasury securities generally settle on a T+1 basis, one business day after the trade date, which differs from the T+2 cycle for most equities.
Question 5: In a correspondent clearing relationship, what is the 'introducing broker' responsible for?
- Holding customer assets and executing settlement with the DTC
- Acquiring customers, executing trades, and forwarding account records to the clearing firm (Correct answer)
- Providing net capital to support the clearing firm's settlement obligations
- Operating the ACATS system to transfer customer accounts
Correct answer: Acquiring customers, executing trades, and forwarding account records to the clearing firm
The introducing broker is responsible for the customer-facing activities—soliciting business and executing trades—while delegating custody and settlement to the clearing firm.
Question 6: What is the purpose of a 'good delivery' standard in securities transactions?
- To define when a trade confirmation must be mailed to the customer
- To specify the requirements a security transfer must meet to be accepted by the receiving party (Correct answer)
- To set the minimum denomination for municipal bond transactions
- To establish the cutoff time for same-day settlement of equity trades
Correct answer: To specify the requirements a security transfer must meet to be accepted by the receiving party
Good delivery standards define the specific conditions (proper endorsement, lot size, absence of restrictions) a security must meet so that the receiving firm is obligated to accept it.
Question 7: Which of the following best describes 'street name' registration of securities?
- Securities registered in the customer's own name held at a bank
- Securities held in the name of the broker-dealer or its nominee on behalf of the customer (Correct answer)
- Securities issued in bearer form with no registered owner
- Securities registered directly with the issuing company's transfer agent
Correct answer: Securities held in the name of the broker-dealer or its nominee on behalf of the customer
Street name registration means securities are held in the broker-dealer's (or its nominee's) name at DTC, facilitating easy book-entry transfer while the customer remains the beneficial owner.
Series 99 Trade Settlement & Clearance Procedures 5
What is a 'depository participant' in the context of DTC?