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Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

On Wednesday, May 13, a retail investor purchases corporate bonds through a registered broker-dealer, which fills the order directly from its own proprietary account inventory. Based on FINRA and SEC rules governing regular-way settlement dates and trade confirmation disclosures, which of the following correctly describes the settlement timeline and required capacity disclosure for this transaction?

  1. Settlement occurs on Thursday, May 14 (T+1), and the confirmation must disclose that the broker-dealer acted as a principal and included a mark-up or mark-down.Answer
  2. B
    Settlement occurs on Friday, May 15 (T+2), and the confirmation must disclose that the broker-dealer acted as a principal and included a mark-up or mark-down.
  3. C
    Settlement occurs on Thursday, May 14 (T+1), and the confirmation must disclose that the broker-dealer acted as an agent and charged a commission.
  4. D
    Settlement occurs on Wednesday, May 13 (cash settlement), because trades executed out of firm inventory bypass National Securities Clearing Corporation (NSCC) clearance and deposit directly with the Depository Trust Company (DTC).

Answer

Settlement occurs on Thursday, May 14 (T+1), and the confirmation must disclose that the broker-dealer acted as a principal and included a mark-up or mark-down.
Regular-way settlement for corporate securities (both equity and debt) occurs on T+1, which places settlement one business day after trade date (Thursday, May 14). Additionally, when a firm executes a transaction using its own inventory, it acts in a principal capacity. Under SEC Rule 10b-10 and FINRA confirmation guidelines, the trade confirmation must disclose that the firm acted as principal and state the mark-up or mark-down charged.

Step-by-Step Solution

1
Determine the regular-way settlement date for corporate bonds.
Under SEC Rule 15c6-1, regular-way settlement for corporate bonds is T+1 (one business day after the trade date). Trading on Wednesday, May 13 results in settlement on Thursday, May 14.
Standard industry rules establish T+1 for corporate equities, corporate bonds, municipal securities, and U.S. Treasuries.
2
Determine the capacity of the broker-dealer and required confirmation disclosure.
Fulfilling an order directly from the firm's inventory means the firm acts as a principal (dealer). The trade confirmation must disclose principal capacity and the mark-up or mark-down assessed.
FINRA Rule 2231 / SEC Rule 10b-10 mandate that firms disclose whether they acted as agent (charging a commission) or principal (charging a mark-up/mark-down) on customer trade confirmations.

Key Concept

Regular-Way T+1 Settlement and Broker-Dealer Capacity Disclosures
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions