Following the execution of an equity transaction between two member broker-dealers, several operational steps take place to complete clearance and settlement. What is the correct chronological sequence of these steps from execution to final settlement?
- 1Trade data is submitted to the National Securities Clearing Corporation (NSCC) for matching and trade comparison.
- 2NSCC assumes the role of central counterparty through novation, guaranteeing performance for both buying and selling broker-dealers.
- 3NSCC nets all open positions through the Continuous Net Settlement (CNS) system to determine a single net quantity of securities and cash due for each firm.
- 4The Depository Trust Company (DTC) completes settlement by transferring share ownership electronically between participant accounts via book-entry.
Answer
The correct sequence begins with trade reporting to NSCC for matching, followed by NSCC novation as central counterparty, then CNS position netting, and finally book-entry share transfer at DTC on settlement date.
The trade-to-settlement lifecycle follows a strict operational sequence: first, trade comparison and matching take place at the clearing level (NSCC); second, NSCC performs novation to become the central counterparty; third, NSCC nets daily obligations using Continuous Net Settlement (CNS); and fourth, the depository entity (DTC) executes final electronic book-entry delivery of the shares.
Step-by-Step Solution
Key Concept
Post-Trade Life Cycle and Clearing Entity Roles
Estimated Time:45s