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Difficulty: Very hardMarket Participants and Investor Classifications

A broker-dealer sells municipal bonds out of its own inventory to a retail investor, adding a markup to the price. To process the transaction, trade comparison and continuous net settlement (CNS) are executed by a clearing agency, while book-entry recordkeeping and asset custody are handled by a central securities depository. Which of the following statements correctly identifies the operational capacity of the firm and the specific market infrastructure entities performing these clearing and depository functions?

  1. The firm acted in a dealer (principal) capacity; trade netting and clearing are performed by the National Securities Clearing Corporation (NSCC), and asset custody is maintained by the Depository Trust Company (DTC).Answer
  2. B
    The firm acted in a broker (agent) capacity; trade netting and clearing are performed by the National Securities Clearing Corporation (NSCC), and asset custody is maintained by the Depository Trust Company (DTC).
  3. C
    The firm acted in a dealer (principal) capacity; trade netting and clearing are performed by the Depository Trust Company (DTC), and asset custody is maintained by the National Securities Clearing Corporation (NSCC).
  4. D
    The firm acted in a dealer (principal) capacity; trade netting and clearing are performed directly by the Securities and Exchange Commission (SEC), and asset custody is maintained by FINRA.

Answer

The firm acted in a dealer (principal) capacity, trade netting and clearing are performed by the National Securities Clearing Corporation (NSCC), and asset custody is maintained by the Depository Trust Company (DTC).
Selling securities directly from a firm's proprietary inventory while charging a markup specifies that the broker-dealer is acting in a dealer (principal) capacity. In the post-trade infrastructure, the National Securities Clearing Corporation (NSCC) manages trade clearance and continuous net settlement, whereas the Depository Trust Company (DTC) provides centralized safekeeping, custody, and book-entry transfer services.

Step-by-Step Solution

1
Determine the broker-dealer firm capacity
Principal (Dealer) capacity
Trading from the firm's own inventory and charging a price markup defines a principal (dealer) transaction. An agent (broker) capacity applies when matching buyers and sellers for a commission.
2
Identify the entity responsible for trade comparison, netting, and clearing
National Securities Clearing Corporation (NSCC)
The NSCC, a subsidiary of DTCC, acts as the central counterparty responsible for clearing, trade comparison, and continuous net settlement (CNS) of corporate and municipal securities.
3
Identify the entity responsible for asset custody and book-entry settlement
Depository Trust Company (DTC)
The DTC, also a subsidiary of DTCC, serves as the central securities depository that maintains immobilised custody of securities certificates and facilitates automated electronic book-entry transfers.

Key Concept

Market Participant Capacities and Post-Trade Settlement Entities (NSCC vs. DTC)
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Topics

Market Participants and Investor Classifications

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