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Difficulty: MediumBroker-Dealers, Investment Advisers, and Intermediaries

Following the execution of a stock trade between two member brokerage firms on a national exchange, an intermediary automates trade comparison and continuous net settlement to establish a single net position for each firm at the end of the day. Which financial intermediary performs this netting and clearing function?

  1. National Securities Clearing Corporation (NSCC)Answer
  2. B
    Depository Trust Company (DTC)
  3. C
    Transfer Agent
  4. D
    Securities and Exchange Commission (SEC)

Answer

The National Securities Clearing Corporation (NSCC)
The National Securities Clearing Corporation (NSCC) serves as the primary central clearing agency for US equity markets. It automates trade comparison, clearing, and continuous net settlement (CNS), reducing the total number of financial transactions and security transfers required among member firms at the end of each trading day.

Step-by-Step Solution

1
Identify the primary post-trade operational requirement described in the scenario
The scenario highlights trade comparison and continuous net settlement (CNS) among trading participants.
Automated clearing systems consolidate daily trade obligations to minimize physical cash and security movement between broker-dealers.
2
Distinguish clearing and netting functions from custody and depository functions
Trade netting and central clearing are executed by the NSCC, whereas custody and book-entry transfers are handled by the DTC.
While both entities are subsidiaries of the Depository Trust & Clearing Corporation (DTCC), the NSCC specifically manages clearing risk and daily trade netting.

Key Concept

Trade Clearance and Continuous Net Settlement (NSCC vs. DTC)
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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