SIE19

Cash Settlement Trade

Cash settlement, or same-day settlement, requires delivery of securities from the seller and payment from the buyer on the same day a trade is executed. Stocks or bonds sold for cash settlement must be available on the spot for delivery to the buyer. Both parties to the transaction would have to agree for cash settlement to occur. Cash settlements are rare but still occur. Both parties (buyer and seller) to a cash settlement must agree before the trade takes place. A cash settlement is a trade that settles on the trade date. DO NOT confuse this with a cash trade, which is simply a trade that does not involve an margin borrowing: the buyer paid for the trade "cash"

Q: Shares held in electronic form at a clearing house under a broker-dealers account are

A: A) are in custodial name. B) held in street name. C) in trust name. D) held in safe keeping. Answer is B E: Shares held in street name are normally registered to the broker-dealer, who hold them on behalf of the client at the broker-dealers clearing firm.

Q: A signature endorsement on a stock certificate would not be required for good delivery if the shares were

A: A) are in custodial name. B) in trust name. C) held in street name. D) held in safe keeping. Answer is C E: Shares held in street name are normally registered to the broker-dealer, who hold them on behalf of the client. As these shares are likely only in electronic form no signature is required to transfer them.

*****

All option trades settle next business days. The exercise of an Index option settles the next business day.

Good Delivery

Good delivery rules govern the delivery of physical stock and bond certificates in a trade. When a certificate is delivered, it must be endorsed (signed) 1. by all owners whose name appears on the face of the certificate AND 2. signed exactly as the name appears Only exception for a difference is the & symbol in place of AND The customer could sign a separate document called a STOCK POWER. common to use these when the certificate will be mailed. When mailing a certificate, a customer would send the certificate and the signed power under separate cover. The stock power identifies the specific certificate (issuer, number of shares, certificate number)

Settlement Dates and Good Delivery

Settlement occurs by the end of the business day either one or two business days following the trade date. T+1 or T+2. That depends on the type of security. This is called the REGULAR WAY settlement.

Settlement rules are for secondary market trades

Settles in T+1 -All Treasury Securities: T bills, notes, bonds Settles in T+2 -Corporate Issues (stocks and bonds) -Municipal Debt -Agency securities such as GNMA -GSE securities such as FNMA and FHLMC

What has to happen by the end of the settlement day?

The BD representing the seller receives the cash due the seller and the BD representing the buyer receives the securities due the buyer in good order.

Settlement

When a customer's trade is executed, it begins a process called settlement. Settlement is the process that ensures that both parties to a transaction receive what they are supposed to receive: money to the seller and securities to the buyer. Settlement is designed to ensure that the trade is completed in a timely manner. Depending on the type of transaction, trades must be completed (settled) by the end of the day on the settlement date.

Settlement for Option Trades and Option Exercises

When an option trades, settlement is T+1 This applies to all option trades. When an option is exercised by the owner (long), there is a required time for completion. This is often referred to as "settlement"; though it is not a settlement of a trade, the mechanics are similar. In an Equity OPTION exercise, the transaction must be completed by the second business day T+2 after the exercise. This 2-day delay allows the person delivering the stock time to acquire the stock to be delivered. The settlement process is essentially the same: one side receives the stock and the other is paid. In the exercise of an INDEX OPTION, there is no underlying security to deliver. The writer pays the owner cash equal to the in-the=money amount. This payment is the next business day T+1

Delivery of Physical Certificates and Electronic Holdings

When securities is issued with physical paper certificates (bonds or shares), it is those certificates that would be required for physical delivery. However, most securities are sold without a physical certificate. In those instances, evidence of ownership is kept on record at a central agency. (Book-entry form). Transfer of ownership is recorded by entering the change on the books or electronic files and is more efficient and faster than paper certificates.