Chapter 8 Part 2 Clearing part 2 Flashcards Preview

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Flashcards in Chapter 8 Part 2 Clearing part 2 Deck (15)
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Brokerage Arrangements
Prime Brokerage

When a primary B/D provides a large client (e.g., hedge fund) with the ability to clear all trades through a centralized firm with executions occurring with multiple B/Ds •Prevents a single firm from determining the client’s strategy


The prime broker offers specialized services such as

custody, securities lending, margin financing, clearing, processing, operational support, research, and customized reporting


Prime Brokerage Illustrated
The client, prime broker, and all executing brokers will communicate regarding trades placed, settled, etc.
Equity Trades
Bond Trades
Derivative Trades
All trades settle and clear through the prime broker



Red Flag Issue

You receive a Don’t Know (DK) notice from a broker- dealer that your client uses for execution purposes. After contacting the client, they direct you to settle the trade with a different broker-dealer which results in another DK notice. Further communications with the client result in redirected settlement notices and further DK notices. What is your primary concern?

Don't have the notes


8-1 Which of the following statements are true about DTCC:

I. It is not an acceptable location for broker dealers to hold customers' excess margin securities.
II. It is the parent of the NSCC
III It assists in the clearing and settlement of transactions
IV It was established by Congress and is wholly owned by the Federal Reserve.

II and III

DTCC acts as a depository to provide clearing, settlement, and information services for its members.

The organization is industry owned - owners include broker-dealers, banks, and mutual fund companies.

Exchanges between these members are accomplished through computerized bookkeeping entries.

DTCC provides clearing and settlement services through subsidiaries such as NSCC (National Securities Clearing Corp) and FICC (Fixed Income Clearing Corp)

The DTCC is an acceptable lactation for a broker-dealer to hold excess margin securities


8-2 BB is a participant in the National Securities Clearing Corporation (NSCC). Which of the following securities would Bruckman NOT clear through the NSCC?

b. Equity Options

NSCC will clear

corporate debt,
municipal debt,
American Depository Receipts
exchange traded funds
unit investment trusts


8.2.2 Options are cleared through ___

OCC (Options Clearing Corporation)


8.3 A member firm is allowed to assign an exercise notice to its customers on what types of basises

1. random selection basis,
2. first-in, first out basis
3. or any way fair

May NOT assign notice by customers with the largest position


8.4 Broker dealer Q clears through broker dealer Z on a fully disclosed basis. For record-keeping purposes, the SEC considers the client to be customers of the:

A. Clearing Firm
B. Introducing Firm
C. Either firm at the customer's choosing
D. Either firm at the FINRA's choosing

A In a fully disclosed relationship, customer accounts are opened at the clearing firm, which is responsible for confirmations and most other customer account records.


8.5 Iota Brokerage clear on a fully disclosed basis through Bruin Securities. Bruin has recently amended its agreement with Iota. Who must file the amended agreement with FINRA:

Bruin, the clearer must file the amended agreement with FINRA for review and approval


8-6 Which of the following statements regarding hedge funds is TRUE?

a. may be sold to only accredited investors
b. are liquid investments
c. have lock-up provisions
d. are typically exchange-traded

c. have lock up provisions


8-7 All of the following choices are typical prime brokerage clients, EXCEPT:

a. Higher net work clients
b. Institutions
c. Individual retail clients
d. Hedge funds

c. Individual retail clients


8-8 Which of the following choices would be considered a wrap account?

B. An account which the client pays a single fee for all investment advice and transactions.

A wrap account is a brokerage account in which a client is charged with a single fee for all services, including:

investment advise,
execution service, and


8-9 To be defined as an investment adviser, the IA must:

Must meet the ABC test

Three things

ABC test

-provide Advice
-as a regular part of its Business
-and receiving Compensation


8-10 An RR reads an e-mail from a customer who claims that he did not receive a written confirmation of a transaction that occurred one week ago. The RR should check with which of the following entities to determine if the confirmation was sent?

b. the margin department
c. the purchase and sales department
d. the mail room

c. the purchase and sales dept

it is in charge of sending the confirm