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CWM - Fin Mar > Custody and Central Securities Depositories > Flashcards

Custody and Central Securities Depositories Flashcards

1
Q

What is settlement?

A

Transfer or ownership from seller to buyer & transfer of cash.

Contains two parts: Clearing and Settlement

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2
Q

What is clearing?

A

The calculation of obligation.

The securities to be transferred & money to be paid

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3
Q

What is cash on delivery?

A

Goods must be paid for at delivery or else they will be returned

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4
Q

What is delivery versus payment

A

Securities are only delivered after payment has been made

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5
Q

What is the US settlement cycle, and who is responsible for the system?

A

T+1 as of May 2024
Depository Trust & Clearing Corporation (DTCC)

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6
Q

What is the settlement cycle in the UK

Who is responsible for it?

A

T+1 for Gilts
T+2 for Equities and Corporates

CREST

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7
Q

What is the settlement cycle in Japan
Who is responsible for it?

A

T+2 for Corporates and Equities
T+1 for JGBs

Japan Securities Depository Centre (JADSEC)

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8
Q

How does crest work for international stocks?

A

CREST places stocks at a local depository. E.g. Clearstream for Germany or the DTCC for US equities.

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9
Q

What is a clearing house?
What is it vital to doing and how?

A

An institution which settles and clears transactions.

Vital to minimising counterparty risk via novation

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10
Q

What is novation?

A

The process by which the clearing house turns one contract into two

In both contracts the clearing house becomes the central counterparty to both parties

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11
Q

Why do clearing houses require margin and collateral?

A

As the counterparty to all transactions - market failure is contingent on their capitalisation

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12
Q

Give 4 acceptable forms of margin:

A

1) Cash (confirmed by bank certificates)
2) Short Term Govt Securities
3) Stock in the clearing corporation
4) Letter of credit issued by an approved bank

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13
Q

What is initial margin?

A

Posted at the beginning of the trade - covers the maximum daily price fluctuations

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14
Q

What is variation margin?

A

Clearing house requires more margin to cover price moves

Via direct debit within an hour

This lets the clearing house maintain control over margins and minimise risk

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15
Q

How has the role of the clearing house has expanded over time?

A

1) Transaction Process
2) Post-trade management
3) Management of collateral
4) Final settlement (delivery of good or payment to seller)
5) Risk Management
6) Guarentee performance of contracts

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16
Q

Who is the major UK clearing house?

A

London Clearing House (LCH ltd)

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17
Q

Who are the major European clearing houses?

A

EuroCCP
ICE Clear Europe (Supervised by BoE)
EUREX (German)

EMIR recognises ICE and EUREX as CCPs

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18
Q

What does a Central Securities Depository do? (CSD / ICSD)

A

1) Custody of Assets
2) Settlement of Securities
3) Track ownership
4) Secure storage

19
Q

How many CSDs do each countries have?

A

Generally one who is assoicated with the domestic stock exchange

They are often heavily regulated

20
Q

What is an ICSD

A

Provides settlement / custody services for international securities

21
Q

What are the primary functions of a CSD?

A

1) Immobilisation (placing physical assets / certificates at a central depository)
2) Safekeeping - Dematerialising, etc.
3) Deposit and Withdrawal
4) Corporate Action Processing (voting, buybacks, take up rights etc.)
5) Pleding

22
Q

What is a custodian?

A

An organisation responsible for ensuring that a client’s assets are fully protected at all times.

23
Q

What services does a custodian provide?

A

1) Safekeeping
2) Arranging Delivery
3) Collect dividend income and interest
4) Monitor entitlements (e.g. corporate actions)
5) Manage Tax
6) Register securities
7) Provide Market Info

24
Q

What are the 4 options when making custody arrangements?

A

1) Global Custodian - full range of markets
2) Regional Custodian - multiple markets in one region
3) Local Custodian - one market
4) CSD / ICSD

25
Q

Give an example of a global custodian and how they work?

A

Network of local custodians - e.g. Citi have over 100

Can also use external agents as “sub-custodians”

26
Q

Who can be a sub-custodian

A

The global custodians own branch

Local agent bank

Regional Provider

27
Q

What is a local custodian?

A

Banks which specialise in providing custody to their home market

Experts / specialits in their market

Dying breed compared to global custodians

28
Q

When are local custodians particuarly attractive?

A

1) When practices differ greatly from global standards
2) Relationship between custodian / regulatory authorities leaves it well positioned.

29
Q

Give 5 advantages of local custodians:

A

1) Country Specialists
2) Act as “eyes and ears” of the global custodian
3) Regular dealings with regulators and politicians - can improve efficiency
4) Expert knowledge of practices, culture and language
5) May offer opportunities for reciprocal business

30
Q

Give 3 disadvantages of local custodians:

A

1) Credit Rating not up to requirement
2) Cannot offer the same discount that regional can
3) Tech / Service may lag behind regional custodians

31
Q

What is a regional custodian?

Give two examples of large regional custodians:

A

Provides custodian services across multiple markets in a region

HSBC & Stan Chart

32
Q

What are the advantages of a regional custodian:

A

1) Higher credit rating than local
2) Can learn from experience in one market to another
3) Can offer discounts to global custodians using many of its markets
4) benefit from economies of scale
5) Tech / service better than locals
6) Size of firm and its clients can exert pressure on regulators

33
Q

Give 3 disadvantages of regional custodians:

A

1) Less well attuned to local market practice and culture
2) Due to spread of clients - each client may not receive the level of attention a local custodian could offer
3) Lack the customer base/track record of local custodians

34
Q

What 3 ways do crypto custodians differ from traditional custodians?

A

1) Security - tougher security measures needed like cold storage, biometrics
2) Regulation - lack of regulation
3) Transparency - Due to the complex nature of crypto, more transparency is required to ensure customers are aware of the actions of the custodian

Aside from this, broadstrokes they are similar to traditional custodians

35
Q

What is cold storage?

A

Storing an investor’s private key offline

36
Q

Who are the major users of Crypto custodians?

A

Hedge Funds, Governments and institutional investors

37
Q

What is laid out in a custody agreement?

A

1) How the assets are held, protected and segergated
2) The responsibilities and obligations of the custodian
3) Define actions that require instruction and which do not (also allow 3rd parties e.g. managers to give instruction)
4) Reporting obligations
5) Standards of Service / Care
6) Contingency to cope with failure

38
Q

What is a sub-custody agreement, what two things are included?

A

An agreement between a global custodian and a firm they employ to act as a sub-custodian

1) Responsibilities of the sub-custodian
2) How assets will be held and kept seperate

39
Q

What is a service level agreement and what is included in one?

A

An agreement of the standard of service required
1) Record Keeping
2) Market Knowledge
3) Stock Lending and Borrowing
4) Communication
5) Processing corporate actions

40
Q

What is the process of selecting a custodian?

A

1) RFI
2) RFP
3) Further interview / investigation after RFP screening

41
Q

What does a RFP include?

A

1) Background information
2) capacity of IT / Staff / Systems
3) Track record / experience
4) Recent Losses
5) Credit Worthiness

It is effectively a large survey to filter out candidates - its an early stage of the process

42
Q

What legislation largely effects custodians?

A

Pension regulation e.g. UK Pension Act

42
Q

Why does pension legislation affect custodians?

A

Pension trustees are responsible for appointing custodians. Trustees are liable for civil penalties

43
Q

What standards must pension trustees adhere to?

A

1) Demonstrate familiarity with the structure / aim of pension scheme
2) Must have appropriate training and skill
3) Monitor and review tasks they delegate to third parties
4) Loyalty demands means trustees must act in best interest of members
5) Avoid undue risk

CWM - Fin Mar (54 decks)

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