Chapter 3 - Settlement Characteristics

Question 1

What is securities settlement?

Answer 1

The process of transferring securities and funds between buyer and seller after a trade

Question 2

What is trade matching?

Answer 2

The process where trade details (price, quantity, counterparty) are verified before settlement

Question 3

What is settlement risk?

Answer 3

The risk that one party fails to deliver cash or securities on settlement day

Question 4

What is post-trade processing?

Answer 4

The steps after a trade is executed, including clearing, settlement, and custody

Question 5

What are the key steps in trade settlement?

Answer 5

Trade execution → Clearing → Settlement → Custody

Question 6

What is clearing in securities trading?

Answer 6

The process of verifying trade details and preparing for settlement

Question 7

What is a Central Counterparty (CCP)?

Answer 7

An intermediary that guarantees trade settlement, reducing counterparty risk

Question 8

What is novation in trade clearing?

Answer 8

The process where a CCP becomes the buyer to every seller and the seller to every buyer

Question 9

What is a bilateral trade settlement?

Answer 9

A settlement where two counterparties exchange securities and cash directly

Question 10

What is a multilateral netting system?

Answer 10

A system where multiple trades are offset, reducing the number of payments needed

Question 11

What is T+2 settlement?

Answer 11

A system where trades settle two business days after the trade date

Question 12

What is a same-day settlement (T+0)?

Answer 12

A system where trade settlement occurs on the same day as execution

Question 13

What does rolling settlement mean?

Answer 13

A system where settlement happens on a fixed cycle (e,g T+2) rather than a specific date

Question 14

What is a fail in securities settlement?

Answer 14

A situation where one party does not deliver securities or cash on the agreed settlement date

Question 15

What is a buy-in process?

Answer 15

A remedy where a buyer purchases securities in the market to cover a seller’s failure

Question 16

What is Delivery Versus Payment (DVP)?

Answer 16

A settlement method ensuring securities are delivered only if payment is received

Question 17

What is Free of Payment (FOP)?

Answer 17

A securities transfer without simultaneous payment

Question 18

What is Delivery Versus Delivery (DVD)?

Answer 18

A method where securities are exchanged between two parties without cash settlement

Question 19

What is Payment Versus Payment (PVP)?

Answer 19

A settlement mechanism ensuring payment occurs in both currencies before trade completion

Question 20

What is a real-time gross settlement (RTGS) system?

Answer 20

A system that settles transactions instantly on a one-by-one basis

Question 21

What is a custodian bank?

Answer 21

A financial institution that holds and safeguards securities for investors

Question 22

What is a Central Securities Depository (CSD)?

Answer 22

An entity that holds securities electronically and facilitates settlement

Question 23

What is an International Central Securities Depository (ICSD)?

Answer 23

A global depository (e g, Euroclear, Clearstream) that handles cross-border settlements

Question 24

What is a nominee account?

Answer 24

An account where a financial institution holds securities on behalf of investors

Question 25

What is a beneficial owner?

Answer 25

The actual owner of securities, even if held in a nominee account

Question 26

What is securities lending?

Answer 26

The temporary transfer of securities from one party to another for a fee

Question 27

What is a repo (repurchase agreement)?

Answer 27

A short-term sale of securities with an agreement to repurchase them at a higher price

Question 28

What is collateral in securities lending?

Answer 28

Assets provided by the borrower to secure the loan of securities

Question 29

What is a short squeeze?

Answer 29

When short sellers are forced to buy back securities at rising prices due to supply shortages

Question 30

What is rehypothecation?

Answer 30

When a bank or broker uses a client's collateral for its own transactions

Question 31

What is a failed trade?

Answer 31

A trade that does not settle due to missing cash or securities

Question 32

What is a settlement delay?

Answer 32

When settlement takes longer than the expected cycle due to operational issues

Question 33

What is counterparty risk?

Answer 33

The risk that the other party in a transaction defaults on its obligations

Question 34

What is operational risk in trade settlement?

Answer 34

The risk of errors, system failures, or human mistakes affecting settlement

Question 35

What is systemic risk?

Answer 35

The risk that failure in one financial institution leads to widespread market disruption

Question 36

What is a corporate action?

Answer 36

An event initiated by a company that affects its securities (eg, dividends, mergers)

Question 37

What is an ex-dividend date?

Answer 37

The date when a stock begins trading without the right to the next dividend

Question 38

What is a stock split?

Answer 38

A corporate action increasing the number of shares while reducing the share price

Question 39

What is a rights issue?

Answer 39

When a company offers new shares to existing shareholders at a discount

Question 40

What is a mandatory corporate action?

Answer 40

An event that affects all shareholders (e g , stock splits, mergers)

Question 41

What is the role of a financial regulator in trade settlement?

Answer 41

To oversee settlement practices and enforce compliance with market rules

Question 42

What is the Central Securities Depositories Regulation (CSDR)?

Answer 42

EU regulation that standardizes securities settlement rules and reduces settlement failures

Question 43

What is Know Your Customer (KYC) in securities trading?

Answer 43

A requirement for financial institutions to verify the identity of clients

Question 44

What is Anti-Money Laundering (AML) compliance?

Answer 44

Regulations to prevent financial crime through securities transactions

Question 45

What is the penalty for failed settlement under CSDR?

Answer 45

Financial fines and mandatory buy-ins for persistent settlement failures

Question 46

What is Straight-Through Processing (STP)?

Answer 46

Automation of trade processing from execution to settlement without manual intervention

Question 47

What is blockchain in trade settlement?

Answer 47

A distributed ledger system that ensures secure, transparent trade processing

Question 48

What is the impact of AI in post-trade operations?

Answer 48

AI enhances risk detection, fraud prevention, and settlement efficiency

Question 49

What is a trade repository?

Answer 49

A centralized database for storing details of securities transactions

Question 50

What is the role of FinTech in securities settlement?

Answer 50

Improving speed, security, and efficiency through digital solutions