Customer Disclosure and Settlement Rules Flashcards
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Questions and Answers

What happens to Open Buy Limits and Open Sell Stops on ex date?

  • They are canceled
  • They are executed immediately
  • They remain unchanged
  • They are reduced (correct)

    • What will happen to the order to sell short 100 shares of ABC at $71 after ABC goes ex dividend $0.55?

  • Sell short 100 ABC at $70.50 Stop
  • Sell short 100 ABC at $71.00 (correct)
  • Sell short 100 ABC at $70.45 Stop
  • Sell short 100 ABC at $70.55 Stop

    • What would be the adjusted order for selling 1,000 shares of ABC at $50 Stop after a 10% stock dividend?

  • Sell 1,100 shares of ABC at $45.45 Stop (correct)
  • Sell 1,000 shares of ABC at $45.45 Stop
  • Sell 1,100 shares of ABC at $50.00 Stop
  • Sell 1,000 shares of ABC at $50.00 Stop

    • If a stock is purchased for cash on July 31st before the record date of August 1st, which statements are TRUE?

    <p>If the stock is purchased for cash, the customer will receive the dividend</p> Signup and view all the answers

    Which of the following securities deliveries are considered 'good'?

    <p>Trust securities with an assignment from the Trustee</p> Signup and view all the answers

    Which of the following is NOT considered a 'good' delivery for securities?

    <p>Custodian securities with an assignment from the gift recipient</p> Signup and view all the answers

    Which scenarios make a stock certificate a good delivery?

    <p>An unsigned stock certificate with a signed stock power</p> Signup and view all the answers

    All of the following securities deliveries are 'good' EXCEPT:

    <p>Ten 40-share certificates</p> Signup and view all the answers

    What is a due bill?

    <p>A notice sent from a broker-dealer to the contra broker-dealer indicating that the buying customer is due the dividend.</p> Signup and view all the answers

    What should a broker-dealer do if mutilated stock certificates are received for deposit?

    <p>Hold the mutilated certificates and request a validation letter from issuer</p> Signup and view all the answers

    How is accrued interest on corporate bonds computed?

    <p>30/360 up to, but not including, settlement date</p> Signup and view all the answers

    How is accrued interest on Treasury bonds computed?

    <p>Actual/actual</p> Signup and view all the answers

    What is the Direct Registration System?

    <p>A book entry registration system for stock issues replacing printed stock certificates.</p> Signup and view all the answers

    If a customer buys a security that is part of the DTC DRS program, what will the customer receive?

    <p>Uncertificated book-entry registration in customer's name</p> Signup and view all the answers

    If a customer buys a fully-paid security that is part of the DTC DRS program, what will the customer receive?

    <p>Payments of dividends or interest from the issuer or transfer agent</p> Signup and view all the answers

    When comparing street name registration to direct registration, which statements are true?

    <p>Direct registration records the owner's name on the transfer agent books</p> Signup and view all the answers

    If a customer buys a fully-paid security enrolled in DTC's DRS system, what will the customer receive?

    <p>Statement of ownership</p> Signup and view all the answers

    Which of these options are correct regarding payment and settlement?

    <p>II and III</p> Signup and view all the answers

    What is cash settlement?

    <p>A procedure in which a trade settles the same business day by 2:30 PM EST.</p> Signup and view all the answers

    What is a cash account?

    <p>An account defined under Regulation T, in which an investor buys securities by paying in full.</p> Signup and view all the answers

    How do regular way trades of options settle?

    <p>Next business day</p> Signup and view all the answers

    What is regular-way settlement?

    <p>The normal settlement method in which securities must be delivered and paid for, no later than 2 business days after the trade date.</p> Signup and view all the answers

    How do regular way trades of U.S. Government securities settle?

    <p>In Federal Funds</p> Signup and view all the answers

    Settlement for over-the-counter trades generally occurs in:

    <p>2 business days in Clearing House funds</p> Signup and view all the answers

    What are Clearing House funds?

    <p>Monies payable upon regular way settlement of a securities transaction at a designated clearing house.</p> Signup and view all the answers

    What are Federal funds?

    <p>An overnight, unsecured loan between bank members of the Federal Reserve System.</p> Signup and view all the answers

    If a client sells stock in a regular way trade on Thursday, when will the funds be reflected in their account?

    <p>The Monday following that Saturday</p> Signup and view all the answers

    Which information is included in a 'When, As and If Issued' trade confirmation?

    <p>Agent or principal transaction</p> Signup and view all the answers

    What is meant by 'when issued'?

    <p>A phrase indicating that a security is trading in the market but not yet available for physical delivery.</p> Signup and view all the answers

    For 'when, as and if issued' trades, which statements are true?

    <p>The amount of accrued interest due is not known</p> Signup and view all the answers

    Which party sends 'Don't Know' notices?

    <p>Dealer to dealer</p> Signup and view all the answers

    What is a comparison in trading?

    <p>A dealer-to-dealer confirmation of a trade listing all relevant data about the transaction.</p> Signup and view all the answers

    What is a 'Don't Know' notice?

    <p>A notice sent from one broker-dealer to another when trade data cannot be reconciled.</p> Signup and view all the answers

    What is the last day to buy GE shares before ex-dividend is declared on Tuesday, November 22?

    <p>Friday, November 18th</p> Signup and view all the answers

    What is ex-date?

    <p>The day on which the price of the stock is reduced by the dividend amount.</p> Signup and view all the answers

    If the record date to receive a dividend is set at Monday, June 13, when can the stock be sold in a regular trade?

    <p>Friday, June 10th</p> Signup and view all the answers

    What is the last day a customer can buy stock 'for cash' to receive a dividend declared payable as of July 29?

    <p>July 29th</p> Signup and view all the answers

    When is the ex-date for a stock split set?

    <p>1 business day following the Payable Date</p> Signup and view all the answers

    Which statements are true when a corporation declares a stock split?

    <p>The market price per share will be reduced</p> Signup and view all the answers

    If a company splits its stock 5:4, what will a holder of 100 shares of $50 stock have after the split?

    <p>125 shares valued at $40 per share</p> Signup and view all the answers

    If a customer owns 100 shares of XYZ stock and there is a 5:4 stock split, how many shares will the customer have?

    <p>125 shares of XYZ at $40</p> Signup and view all the answers

    What will happen to preferred stock after a 3:1 common stock split?

    <p>500 shares at $90 per share</p> Signup and view all the answers

    Following a common stock split, which statements are true regarding a customer who owns 500 shares of preferred stock?

    <p>1,500 shares</p> Signup and view all the answers

    When a corporation declares a reverse stock split, which statements are TRUE?

    <p>Each shareholder's proportionate ownership remains the same</p> Signup and view all the answers

    After a reverse stock split of 1:2, what will a customer with 100 shares at $2 own?

    <p>Market price will be $4 per share</p> Signup and view all the answers

    Which of the following orders will be reduced on ex-date for a cash dividend?

    <p>Buy 100 ABC @ 50</p> Signup and view all the answers

    What does DNR mean in trading?

    <p>Do Not Reduce.</p> Signup and view all the answers

    Which open orders held by a member firm would be adjusted if the ex-date for a cash dividend were tomorrow?

    <p>Sell 100 ABC @ 40 Stop GTC</p> Signup and view all the answers

    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?

    <p>DTC</p> Signup and view all the answers

    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

    <p>I and IV</p> Signup and view all the answers

    All of the following are true about confirmation disclosure in agency transactions EXCEPT the:

    <p>Time of confirmation must be made available to the customer</p> Signup and view all the answers

    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?

    <p>Non-NASDAQ agency trades</p> Signup and view all the answers

    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

    <p>I, II, III</p> Signup and view all the answers

    What is a confirmation?

    <p>A notice sent from the broker to the customer no later than the day after the trade date that discloses the details of the execution of an order, including price, number of shares, settlement date, and commission.</p> Signup and view all the answers

    What is a principal transaction?

    <p>A trade where a member firm acts as a dealer in the transaction, selling the security to the customer out of the firm's inventory; or buying the security into the firm's inventory from the customer.</p> Signup and view all the answers

    What is an agency transaction?

    <p>A trade where the executing member acted as a middleman or broker, finding the best market price for the customer.</p> Signup and view all the answers

    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

    <p>II, III, IV</p> Signup and view all the answers

    What is a general obligation (GO) bond?

    <p>A municipal debt security that is backed by the full faith, credit, and taxing power of the municipality.</p> Signup and view all the answers

    What is a revenue fund?

    <p>The collection account provided under the 'flow of funds' in a revenue bond trust indenture.</p> Signup and view all the answers

    What is an industrial revenue bond (IRB)?

    <p>A municipal revenue bond whose interest and principal payments are made from the proceeds of lease payments received from a corporation.</p> Signup and view all the answers

    What is an In-whole call?

    <p>A call option allowing the issuer to call all of an outstanding issue at one time at predetermined dates and prices.</p> Signup and view all the answers

    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:

    <p>Dated date</p> Signup and view all the answers

    What is a dated date?

    <p>The legal issuance date of a new bond issue, marking the start of interest accrual.</p> Signup and view all the answers

    What is a maturity date?

    <p>The date on which the borrower must repay the principal on an outstanding debt security.</p> Signup and view all the answers

    What is a settlement date?

    <p>The date on which the orderly exchange of monies and securities occurs following a purchase or sale.</p> Signup and view all the answers

    Under MSRB rules, yield to worst means that?

    <p>Municipal premium bonds quoted on a yield basis must be priced to the near-term in whole call date</p> Signup and view all the answers

    Under MSRB rules, pricing of callable municipal premium bonds quoted on a yield basis is based upon:

    <p>Worst case scenario</p> Signup and view all the answers

    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

    <p>I only</p> Signup and view all the answers

    What is a sinking fund call?

    <p>A call provision that requires the issuer to call in a portion of a bond issue at regular intervals using accumulated funds.</p> Signup and view all the answers

    What is an extraordinary mandatory call?

    <p>A call provision that specifies extraordinary circumstances when the issuer must call in the bonds.</p> Signup and view all the answers

    Which callable municipal bonds quoted on a yield basis would be priced to the near-term 'in whole' call date?

    <p>Premium bonds</p> Signup and view all the answers

    What is a par bond?

    <p>A bond whose current secondary market price is equal to its principal or face value.</p> Signup and view all the answers

    What is a discount bond?

    <p>A bond currently selling below par value.</p> Signup and view all the answers

    What is a premium bond?

    <p>A bond whose market price is greater than its par value.</p> Signup and view all the answers

    What is a zero-coupon bond?

    <p>A bond that makes no semi-annual interest payments over its life and is issued at a deep discount.</p> Signup and view all the answers

    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

    <p>I and IV</p> Signup and view all the answers

    What is basis?

    <p>The yield to maturity on a bond.</p> Signup and view all the answers

    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

    • What Must Be Disclosed: In agency transactions, customer confirmations must include commission for agency trades, and the amount of accrued interest for bond trades.

    • Mark-ups in Transactions: For non-NASDAQ OTC securities, mark-ups are included in the net price and not separately disclosed.

    • 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

    • Agency Transaction: A trade where a broker acts as a middleman, earning commission by finding the best market price for the customer.

    • Principal Transaction: Involves a member firm acting as a dealer, selling securities from its inventory, profiting from mark-ups or mark-downs.

    • Position Trading: Refers to buying or selling securities from a broker-dealer's own inventory, trading for their own account.

    Confirmation of Municipal Bonds

    • 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.

    • General Obligation Bonds: These bonds are backed by the full faith and credit of the municipality and usually serviced from property taxes.

    Call Provisions

    • In-whole Call and Pricing: Bonds traded at a premium are often priced to the near-term "in whole" call date.

    • Sinking Fund Calls: These are called at predetermined intervals with bonds selected randomly, not meeting the reasonable certainty test.

    Trade Settlement

    • Cash Settlement: Occurs the same business day, requiring full payment. Trades in cash accounts settle faster than those in regular accounts.

    • 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

    • Yield to Worst: When quoting bonds on a yield basis, pricing must reflect the worst-case scenario, particularly for premium and discount bonds.

    • 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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    Description

    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.

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