An investor holding an exchange-listed equity call option decides to exercise the contract prior to expiration. Arrange the following operational steps in the correct chronological order, starting from initial investor action through final delivery of the underlying stock.
- 1The option holder submits formal exercise instructions to their clearing broker-dealer.
- 2The Options Clearing Corporation (OCC) assigns the exercise notice to a clearing member firm holding a short position in the same option series.
- 3The OCC routes the underlying equity transaction to the National Securities Clearing Corporation (NSCC) to be cleared and netted via the Continuous Net Settlement (CNS) system.
- 4The Depository Trust Company (DTC) executes the final book-entry movement of the underlying shares between participant clearing accounts on settlement date.
Answer
The correct operational sequence begins with the option holder submitting exercise instructions to their broker-dealer, followed by OCC assignment to a short clearing member, then OCC routing the resulting stock trade to NSCC for CNS netting, and concludes with DTC completing final book-entry delivery of the shares.
The proper workflow starts with the option holder initiating the exercise request through their broker-dealer. The OCC receives the instruction and assigns the exercise obligation to a short clearing member firm. Next, because the exercise creates an equity transaction, the OCC routes the purchase/sale obligation to the NSCC, which nets the positions through its Continuous Net Settlement (CNS) system. Finally, the DTC executes the actual book-entry transfer of the underlying stock between participant accounts to finalize settlement.
Step-by-Step Solution
Key Concept
Option Exercise to Equity Settlement Workflow (OCC, NSCC, and DTC Roles)