Questions and Answers
What happens to Open Buy Limits and Open Sell Stops on ex date?
What will happen to the order to sell short 100 shares of ABC at $71 after ABC goes ex dividend $0.55?
What would be the adjusted order for selling 1,000 shares of ABC at $50 Stop after a 10% stock dividend?
If a stock is purchased for cash on July 31st before the record date of August 1st, which statements are TRUE?
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Which of the following securities deliveries are considered 'good'?
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Which of the following is NOT considered a 'good' delivery for securities?
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Which scenarios make a stock certificate a good delivery?
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All of the following securities deliveries are 'good' EXCEPT:
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What is a due bill?
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What should a broker-dealer do if mutilated stock certificates are received for deposit?
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How is accrued interest on corporate bonds computed?
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How is accrued interest on Treasury bonds computed?
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What is the Direct Registration System?
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If a customer buys a security that is part of the DTC DRS program, what will the customer receive?
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If a customer buys a fully-paid security that is part of the DTC DRS program, what will the customer receive?
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When comparing street name registration to direct registration, which statements are true?
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If a customer buys a fully-paid security enrolled in DTC's DRS system, what will the customer receive?
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Which of these options are correct regarding payment and settlement?
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What is cash settlement?
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What is a cash account?
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How do regular way trades of options settle?
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What is regular-way settlement?
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How do regular way trades of U.S. Government securities settle?
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Settlement for over-the-counter trades generally occurs in:
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What are Clearing House funds?
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What are Federal funds?
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If a client sells stock in a regular way trade on Thursday, when will the funds be reflected in their account?
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Which information is included in a 'When, As and If Issued' trade confirmation?
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What is meant by 'when issued'?
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For 'when, as and if issued' trades, which statements are true?
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Which party sends 'Don't Know' notices?
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What is a comparison in trading?
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What is a 'Don't Know' notice?
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What is the last day to buy GE shares before ex-dividend is declared on Tuesday, November 22?
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What is ex-date?
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If the record date to receive a dividend is set at Monday, June 13, when can the stock be sold in a regular trade?
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What is the last day a customer can buy stock 'for cash' to receive a dividend declared payable as of July 29?
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When is the ex-date for a stock split set?
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Which statements are true when a corporation declares a stock split?
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If a company splits its stock 5:4, what will a holder of 100 shares of $50 stock have after the split?
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If a customer owns 100 shares of XYZ stock and there is a 5:4 stock split, how many shares will the customer have?
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What will happen to preferred stock after a 3:1 common stock split?
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Following a common stock split, which statements are true regarding a customer who owns 500 shares of preferred stock?
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When a corporation declares a reverse stock split, which statements are TRUE?
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After a reverse stock split of 1:2, what will a customer with 100 shares at $2 own?
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Which of the following orders will be reduced on ex-date for a cash dividend?
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What does DNR mean in trading?
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Which open orders held by a member firm would be adjusted if the ex-date for a cash dividend were tomorrow?
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Once a securities trade occurs, clearance and settlement of the transaction, along with the maintenance of physical custody of the position, will be performed by?
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Which of the following are disclosed on a customer confirmation? I Commission if an agency trade was executed II Mark-up if a principal transaction in a non-NASDAQ OTC security III Inventory position of the dealer IV Amount of accrued interest for a bond trade
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All of the following are true about confirmation disclosure in agency transactions EXCEPT the:
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An OTC confirmation that discloses the remuneration to be received by the member and which makes available to the customer the name of the contra-broker is required for?
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Which of the following must either be disclosed or made available on an agency confirmation? I The remuneration earned by the firm in the transaction II The time of the transaction III The identity of the other party in the transaction
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What is a confirmation?
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What is a principal transaction?
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What is an agency transaction?
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Which of the following MUST be disclosed on municipal bond trade confirmations? I For general obligation bonds, the source of income backing the issue II For revenue bonds, the source of revenue backing the issue III For industrial revenue bonds, the name of the corporation guaranteeing the issue IV 'In Whole' call dates
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What is a general obligation (GO) bond?
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What is a revenue fund?
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What is an industrial revenue bond (IRB)?
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What is an In-whole call?
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All of the following dates are needed to compute the total purchase price of a municipal bond traded on a yield basis in the secondary market EXCEPT:
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What is a dated date?
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What is a maturity date?
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What is a settlement date?
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Under MSRB rules, yield to worst means that?
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Under MSRB rules, pricing of callable municipal premium bonds quoted on a yield basis is based upon:
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Under MSRB rules, which of the following call provisions can affect the yield that is shown on a customer's municipal bond confirmation? I In-whole call II Sinking fund call III Extraordinary mandatory call
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What is a sinking fund call?
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What is an extraordinary mandatory call?
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Which callable municipal bonds quoted on a yield basis would be priced to the near-term 'in whole' call date?
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What is a par bond?
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What is a discount bond?
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What is a premium bond?
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What is a zero-coupon bond?
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For municipal transactions effected on a yield basis, how are these bonds generally priced? I Discount bonds are priced to maturity date II Discount bonds are priced to the near-term call date III Premium bonds are priced to maturity date IV Premium bonds are priced to the near-term call date
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What is basis?
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Study Notes
Customer Disclosure and Settlement Rules
- Depository Trust and Clearing Corporation (DTC): Responsible for clearance and settlement of stock and bond transactions, maintaining custody of physical and electronic securities.
Customer Confirmation
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What Must Be Disclosed: In agency transactions, customer confirmations must include commission for agency trades, and the amount of accrued interest for bond trades.
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Mark-ups in Transactions: For non-NASDAQ OTC securities, mark-ups are included in the net price and not separately disclosed.
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Non-Disclosure Requirements: The identity of the other party in the transaction and the "time of confirmation" are not required to be disclosed to customers.
Types of Transactions
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Agency Transaction: A trade where a broker acts as a middleman, earning commission by finding the best market price for the customer.
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Principal Transaction: Involves a member firm acting as a dealer, selling securities from its inventory, profiting from mark-ups or mark-downs.
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Position Trading: Refers to buying or selling securities from a broker-dealer's own inventory, trading for their own account.
Confirmation of Municipal Bonds
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Required Disclosures on Municipal Bonds: For revenue bonds, the source of revenue backing must be disclosed, while "in whole" call dates must also be included.
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General Obligation Bonds: These bonds are backed by the full faith and credit of the municipality and usually serviced from property taxes.
Call Provisions
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In-whole Call and Pricing: Bonds traded at a premium are often priced to the near-term "in whole" call date.
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Sinking Fund Calls: These are called at predetermined intervals with bonds selected randomly, not meeting the reasonable certainty test.
Trade Settlement
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Cash Settlement: Occurs the same business day, requiring full payment. Trades in cash accounts settle faster than those in regular accounts.
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Regular-way Settlement: Generally occurs in 2 business days for stocks and corporate bonds, while U.S. government securities settle the next business day.
Pricing and Yield
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Yield to Worst: When quoting bonds on a yield basis, pricing must reflect the worst-case scenario, particularly for premium and discount bonds.
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Callable Bonds: Must consider provisions like sinking fund calls and extraordinary mandatory calls, which can influence yield calculations.
Options and their Settlements
- Options Settlement: Regular transactions for options settle next business day, using Clearing House funds, unlike government securities which settle in Federal Funds.
Settlement Processes
- Regular way settlement for securities trades occurs in 2 business days in clearing house funds, with exceptions for U.S. Government securities and options, which settle the next business day.
- U.S. Government securities settle in Federal Funds, while options settle in clearing house funds the next business day.
Clearing House Funds & Federal Funds
- Clearing house funds refer to the monetary transactions settled at a clearing house, typically 2 business days post-trade for equities and bonds.
- Federal funds are overnight loans between member banks of the Federal Reserve, settling on the same day, important for U.S. Government and Agency securities.
Trade Confirmation Insights
- A "When, As and If Issued" trade confirmation lacks an established settlement date at the time of confirmation; it will state if the trade was an agent or principal transaction.
- At the time of "when issued" trades, the settlement date and the amount of accrued interest due are not known.
Trade Matching & Reconciliation
- "Don't Know" notices reconcile unmatched trades between dealers and are communicated on the same day as the trade.
- Comparisons serve as dealer-to-dealer confirmations of trades, aiding in the reconciliation process for seamless settlement.
Ex-Dividend Date & Stock Transactions
- The ex-dividend date is established one business day before the record date, ensuring buyers are logged prior to the dividend eligibility.
- For a stock split, the ex-date is set the business day following the payable date, differing from cash dividend timelines.
Stock Splits and Their Effects
- A standard stock split reduces the market price per share while increasing the total shares outstanding, enticing individual investors due to lower prices.
- Reverse stock splits maintain shareholder ownership proportion but increase individual share price, appealing to institutional investors.
Order Adjustments for Cash Dividends
- Open Buy Limits and Sell Stops are reduced on ex-dividend dates to prevent orders from executing due to price adjustments.
- Orders labeled Do Not Reduce (DNR) will not have their prices adjusted despite dividend announcements.
Security Transaction Examples
- Cash purchase of stocks on the ex-date ensures dividend receipt due to same-day settlement.
- Regular way purchases prior to the ex-date do not guarantee dividends unless settled before the record date.
Summary of Stock Adjustments
- In a stock dividend scenario, an order must reflect the new share quantity and adjusted price post-dividend or split, ensuring accurate transaction representation in the system.
- Understanding the implications of stock titles, preferred vs. common, is vital since only common stock prices are affected by splits and dividends.### Security Assignment
- Guardian securities require assignments by a court-appointed legal guardian.
- Trust securities must be assigned by the designated trustee.
- Partnership securities are assigned by a partner as outlined in the Partnership Agreement.
- Custodian securities cannot be assigned by minors; assignments must be made by the custodian.
Good Delivery of Securities
- Custodian securities assigned by gift recipients are not valid.
- For stock certificate deliveries to be “good,” specific conditions must be met:
- Unsigned stock certificate with a signed stock power is acceptable.
- A signed certificate without a stock power is also considered good delivery.
Certificate Delivery Requirements
- Stock certificates must be in multiples of 100 or total exactly to 100 for dealer-to-dealer transactions.
- Certificates not adhering to this (like individual 40-share certificates) do not constitute good delivery.
Due Bills
- A due bill notifies that a buyer is entitled to a dividend mistakenly sent to the seller.
- Due bills are necessary when there is a settlement delay after buying before the ex-date.
Mutilated Stock Certificates
- When a broker-dealer finds mutilated stock certificates, they should hold them and seek validation from the issuer or transfer agent before crediting the account.
Accrued Interest Calculation
- For corporate bonds, accrued interest is calculated using the 30/360 method up to but not including the settlement date.
- For Treasury bonds, accrued interest follows the actual/actual method up to but not including the settlement date.
Direct Registration System (DRS)
- DRS replaces physical stock certificates with a book entry system for easier tracking and transactions.
- Customers receive uncertificated book-entry registration when buying securities through the DRS program.
Street Name vs. Direct Registration
- In street name registration, the broker-dealer is the recorded owner and receives dividends on behalf of clients.
- In direct registration, the owner's name is recorded, and dividends are paid directly by the issuer or transfer agent to the owner.
Customer Documentation in DRS
- A customer in the DRS system receives a statement of ownership instead of a physical certificate.
- This transition to electronic records streamlines ownership tracking and dividend payments.
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Test your knowledge about customer disclosure and settlement rules in securities trading. This quiz focuses on the roles of various organizations involved in the clearance and settlement processes. Enhance your understanding of important terms and their applications in the finance industry.