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CISI Global Securities Operations study materials
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CISI Global Securities Operations practice questions

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Question 1The financial services industry and the securities market environment

In a securities transaction, which party acts as principal rather than agent when dealing with a client?

  1. A broker executing an order on a recognised exchange on the client's behalf
  2. A market maker quoting two-way prices and dealing on its own account Correct answer.
  3. An agency broker passing the order to a third-party liquidity provider
  4. A settlement agent releasing securities against payment

Explanation

A principal deals on its own account, taking the opposite side of the client's trade and bearing market risk, so its profit comes from the spread rather than a commission. A market maker quoting two-way prices is the classic principal counterparty. Agents, by contrast, arrange trades for a client without becoming a counterparty.

Question 2The financial services industry and the securities market environment

A company needs to raise additional capital without issuing new shares or increasing debt. Which corporate action achieves this?

  1. A scrip dividend paid in new shares
  2. A bond issue placed with institutional investors Correct answer.
  3. A rights issue to existing shareholders
  4. A share buyback executed in the market

Explanation

Issuing bonds raises cash from lenders and creates a debt liability, so no new equity shares are created. A rights issue and a scrip dividend both increase the share count, while a buyback returns cash and reduces shares. Only the bond issue meets the stated constraint of raising capital without new shares.

Question 3The financial services industry and the securities market environment

Which best describes the role of a central securities depository (CSD)?

  1. It guarantees the creditworthiness of issuers whose bonds it lists
  2. It sets the official closing price used to value investment funds
  3. It holds securities in immobilised or dematerialised form and settles transfers by book entry Correct answer.
  4. It matches buy and sell orders and reports executed trades to the regulator

Explanation

A CSD safekeeps securities, typically immobilising physical certificates or holding them in dematerialised form, and transfers ownership by debiting and crediting accounts. Matching and reporting belong to trading venues and trade repositories, and a depository does not underwrite issuer credit. Pricing is a separate function performed by exchanges or data vendors.

Question 4The financial services industry and the securities market environment

An investor buys shares two business days before the record date for a dividend. Under a T+2 settlement convention, what is the likely outcome?

  1. The investor does not receive the dividend because settlement completes after the record date Correct answer.
  2. The investor receives the dividend because the purchase preceded the record date
  3. The investor receives a partial dividend pro-rated to the holding period
  4. The investor receives the dividend only if the broker lends the shares over the record date

Explanation

Entitlement follows the ex-dividend date, which falls before the record date under T+2 so that a buyer settling on the record date is registered in time. A purchase made only two business days before the record date trades ex-dividend, meaning the seller keeps the dividend. Settlement timing, not the purchase date alone, determines entitlement.

Question 5The financial services industry and the securities market environment

Which type of fund issues a fixed number of shares that trade on an exchange and are not continuously created or redeemed?

  1. A money market fund
  2. An index tracking mutual fund
  3. A closed-ended investment company Correct answer.
  4. An open-ended unit trust

Explanation

A closed-ended fund has a fixed share capital, and its shares trade on an exchange at prices set by supply and demand rather than by reference to net asset value. Open-ended vehicles create and cancel units on demand at or near NAV. Money market and index mutual funds are typically open-ended.

Question 6The financial services industry and the securities market environment

A firm executes a client order on a venue and then passes it to a clearing house. What is the clearing house's primary function in this chain?

  1. Custodying the client's securities after settlement
  2. Advising the client on the suitability of the investment
  3. Interposing itself as central counterparty to each side of the trade Correct answer.
  4. Determining the tax treatment of the transaction for the client

Explanation

Through novation the clearing house becomes buyer to every seller and seller to every buyer, reducing counterparty risk for members. It manages margin and default funds rather than giving investment advice. Tax analysis and custody sit with the firm and the custodian respectively.

Question 7The financial services industry and the securities market environment

Which statement correctly distinguishes a primary market transaction from a secondary market transaction?

  1. In the primary market an issuer receives the proceeds; in the secondary market investors trade with each other Correct answer.
  2. In the primary market prices are set by a central bank; in the secondary market prices are set by issuers
  3. In the primary market settlement is always same-day; in the secondary market settlement is always T+2
  4. In the primary market only bonds trade; in the secondary market only equities trade

Explanation

The primary market is where securities are first issued and the issuer raises capital, receiving the subscription proceeds. Once issued, securities trade between investors in the secondary market, and the issuer receives nothing further. The distinction concerns new issuance versus onward trading, not asset class or settlement cycle.

Question 8The financial services industry and the securities market environment

A UK-listed company announces a 3-for-1 share split. What is the immediate effect on an investor holding 300 shares priced at 900 pence each?

  1. 900 shares priced at about 300 pence each Correct answer.
  2. 900 shares priced at about 900 pence each
  3. 300 shares priced at about 900 pence each with a cash payment
  4. 100 shares priced at about 2,700 pence each

Explanation

A split multiplies the share count by three and divides the price by three, leaving total value broadly unchanged. The holder therefore has 900 shares worth roughly 300 pence each. No cash is generated by a split, and the issuer's market capitalisation is unaffected.

Question 9The financial services industry and the securities market environment

Which body typically authorises a company's dividend and must be consulted on major corporate actions such as a takeover?

  1. The company's registrar
  2. The audit committee
  3. The board of directors and, where required, shareholders in general meeting Correct answer.
  4. The exchange's listing department

Explanation

The board recommends and declares dividends within its authority, while significant corporate actions such as mergers usually require shareholder approval at a general meeting. The audit committee oversees financial reporting, the registrar maintains the share register, and the exchange enforces listing rules rather than deciding corporate actions.

Question 10The financial services industry and the securities market environment

Which characteristic is associated with a preference share rather than an ordinary share?

  1. A guaranteed capital return equal to the issue price
  2. Voting rights that always exceed those of ordinary shares
  3. A fixed dividend that ranks ahead of ordinary dividends Correct answer.
  4. Automatic conversion into ordinary shares at maturity

Explanation

Preference shares typically carry a fixed dividend paid before any ordinary dividend and rank ahead on winding up. They usually carry limited or no voting rights, and their capital return is not guaranteed because it depends on the company's position. Conversion applies only to specific convertible issues.

Question 11The financial services industry and the securities market environment

A custodian holds client assets. Which practice best satisfies the segregation principle applied to client money and assets?

  1. Holding client securities in separately designated accounts distinct from the firm's own Correct answer.
  2. Recording client holdings only in the firm's internal ledger
  3. Pooling client and firm assets to reduce administration costs
  4. Transferring client assets to the firm's trading account during margin calls

Explanation

Client assets must be held separately from the firm's own assets, typically in designated accounts, so they can be identified and returned if the firm fails. Commingling with firm assets undermines that protection. Internal records alone do not substitute for proper segregation and reconciliation with the custodian.

Question 12The financial services industry and the securities market environment

Which market participant is most likely to provide liquidity by continuously quoting bid and offer prices for a bond?

  1. A retail investor placing a limit order
  2. A market maker or liquidity provider Correct answer.
  3. A pension fund trustee
  4. A credit rating agency

Explanation

Market makers commit to quoting two-way prices and stand ready to buy and sell, which supplies liquidity to other participants. Pension trustees and retail investors trade for their own portfolios without an obligation to quote. Rating agencies assess credit quality and do not deal.

Question 13The financial services industry and the securities market environment

An investor sells shares short and the price rises sharply. Which risk is most directly illustrated?

  1. Unlimited loss potential from an open short position Correct answer.
  2. Currency risk from foreign dividends
  3. Reinvestment risk
  4. Inflation risk on fixed coupons

Explanation

A short seller must buy back the shares to close the position, and because the price can rise without a theoretical ceiling, the loss is potentially unlimited. Reinvestment risk concerns the rate at which cash flows can be reinvested. Inflation and currency risks relate to coupons and foreign currency exposure rather than the mechanics of a short sale.

Question 14The financial services industry and the securities market environment

Which statement about an exchange-traded fund (ETF) is correct?

  1. ETF prices are fixed daily by the fund's auditor
  2. ETF units trade only at the fund's net asset value at the close
  3. ETFs must hold only physical cash deposits
  4. ETF units can be created and redeemed in large blocks by authorised participants Correct answer.

Explanation

Authorised participants create or redeem ETF units in large blocks in exchange for a basket of the underlying assets, and this arbitrage mechanism keeps the market price close to NAV. ETF units trade intraday on an exchange at market prices. Their holdings vary widely and are not limited to cash.

Question 15The financial services industry and the securities market environment

A bond is issued at par with a 5% coupon while prevailing market yields for similar bonds rise to 6%. What is the likely effect on the bond's price?

  1. The price falls below par so the yield to maturity matches the market Correct answer.
  2. The price rises above par to compensate for the higher yield
  3. The price is unaffected until the next coupon date
  4. The price stays at par because the coupon is fixed

Explanation

Bond prices and yields move inversely: when market yields exceed the coupon, the bond must trade at a discount so that its total return matches the market. The fixed coupon does not change, so price adjustment is the mechanism. The adjustment occurs in the market continuously, not only on coupon dates.

Question 16The financial services industry and the securities market environment

Which document must a prospectus normally contain when a company offers new shares to the public?

  1. The company's internal trading mandates for its dealing desk
  2. The personal tax returns of the chief executive
  3. The settlement instructions of the underwriter's custodian
  4. Details of the offer, the issuer's business and financial position, and the associated risks Correct answer.

Explanation

A prospectus gives investors the information needed to make an informed investment decision, covering the offer terms, the issuer's business and financials, and the principal risks. Internal dealing mandates and custodian settlement instructions are operational documents. Personal tax returns of directors are not prospectus content.

Question 17The financial services industry and the securities market environment

A firm's trade fails to settle on the intended date because the seller has not delivered the securities. Which function addresses the resulting shortfall?

  1. Investment performance attribution
  2. Settlement discipline and fails management, including buy-ins or penalties Correct answer.
  3. Corporate actions processing
  4. Client onboarding and know-your-customer checks

Explanation

Failed trades are handled through settlement discipline regimes that may impose penalties, cash compensation or buy-in procedures to close the open position. Corporate actions processing deals with entitlements such as dividends and splits. Performance attribution and onboarding are unrelated to a delivery failure.

Question 18The financial services industry and the securities market environment

Which statement best explains the function of a trade repository?

  1. It guarantees settlement of every reported trade
  2. It centrally records and stores details of transactions reported by counterparties Correct answer.
  3. It sets margin requirements for clearing members
  4. It matches and executes client orders on an exchange

Explanation

A trade repository collects, stores and makes available transaction data reported by counterparties, improving transparency for regulators. It does not execute trades, guarantee settlement or set margin. Those functions belong to trading venues, clearing houses and central banks or regulators respectively.

Question 19The financial services industry and the securities market environment

An investor holds a convertible bond. Which combination of features does this instrument provide?

  1. A perpetual coupon with no maturity and no conversion option
  2. A fixed coupon with the right to convert into a specified number of shares Correct answer.
  3. A variable dividend with mandatory conversion into cash
  4. A short-dated bill issued at a discount with no coupon

Explanation

A convertible bond pays a coupon like a bond but gives the holder the option to convert into a predetermined number of the issuer's shares. It therefore combines income with equity upside. It is not a variable dividend, a perpetual instrument or a discount bill.

Question 20The financial services industry and the securities market environment

A fund manager wants to gain exposure to an index without buying every constituent. Which instrument is designed for this purpose?

  1. A futures contract on the index Correct answer.
  2. A corporate bond issued by one constituent
  3. A foreign exchange forward on the index currency
  4. A certificate of deposit issued by a bank

Explanation

An index futures contract provides exposure to the overall index performance without purchasing each constituent, and it can be bought or sold on margin. A single corporate bond gives exposure to one issuer. An FX forward addresses currency exposure, and a certificate of deposit is a short-term bank deposit.

Question 21Trade execution, confirmation and affirmation

In institutional securities trading, what is the primary purpose of the trade confirmation process?

  1. To provide a formal record of the executed trade terms that both counterparties can verify and agree Correct answer.
  2. To register the trade with the relevant stock exchange for public disclosure
  3. To calculate the broker's research commission allocation for the client
  4. To determine the credit rating of the issuer whose securities were traded

Explanation

A confirmation is the formal notification of the economic and settlement terms of an executed trade, issued so that both sides can verify the details match what was agreed. It is not a regulatory filing, a commission calculation, or a credit assessment; it is the contractual record underpinning settlement.

Question 22Trade execution, confirmation and affirmation

Which statement best describes the difference between confirmation and affirmation in post-trade processing?

  1. Confirmation is the delivery of trade details by one party to the other, while affirmation is the client's positive agreement that those details are accurate Correct answer.
  2. Confirmation applies only to equities, while affirmation applies only to fixed income
  3. Confirmation occurs after settlement, while affirmation occurs before execution
  4. Confirmation is the client's internal booking, while affirmation is the broker's matching of its own records

Explanation

Confirmation is the act of one party sending the trade details to the other, whereas affirmation is the recipient's explicit agreement that the terms are correct. Affirmation is therefore a positive response to a confirmation, not an internal booking or a settlement-stage activity.

Question 23Trade execution, confirmation and affirmation

A buy-side firm receives trade details from its broker and simply does not respond within the agreed window, allowing the trade to proceed. Which term describes this arrangement?

  1. Standing settlement instruction
  2. Affirmation by non-objection Correct answer.
  3. Positive affirmation
  4. Affirmation by exception

Explanation

Affirmation by non-objection, sometimes called negative affirmation, means the trade is treated as affirmed if the client does not object within a defined period. It differs from positive affirmation, where an explicit response is mandatory before the trade is released to settlement.

Question 24Trade execution, confirmation and affirmation

Which development most directly shortened the affirmation window in many equity markets by matching trade details centrally before settlement?

  1. Abolition of the central securities depository
  2. Replacement of SWIFT messaging with fax confirmations
  3. Central matching utilities that compare counterparty trade data on trade date Correct answer.
  4. Extension of the settlement cycle from T+2 to T+5

Explanation

Central matching utilities allow both counterparties to submit trade data that is compared automatically on trade date, enabling same-day affirmation and reducing fails. Extending the settlement cycle or removing depositories would slow processing rather than accelerate affirmation.

Question 25Trade execution, confirmation and affirmation

Under a typical institutional agreement, when should a broker issue the trade confirmation to the client following execution?

  1. Only after the client has paid for the securities
  2. On the settlement date, together with the custody statement
  3. On trade date, or by the start of business on the next business day Correct answer.
  4. At the end of the calendar month in a consolidated statement

Explanation

Market practice and most institutional terms require the confirmation to be issued on trade date or by the start of the next business day, so the client can affirm in time for settlement. Issuing at settlement or month-end would leave insufficient time to resolve discrepancies.

Question 26Trade execution, confirmation and affirmation

A client receives a confirmation showing a trade price that differs from the price agreed with the sales trader. What is the most appropriate first action?

  1. Dispute the confirmation with the broker promptly so the discrepancy is investigated and corrected before settlement Correct answer.
  2. Instruct the custodian to reject the trade at settlement
  3. Settle at the confirmed price and raise a claim afterwards
  4. Ignore the difference if it is below a defined tolerance

Explanation

Price mismatches must be raised promptly with the counterparty so the trade can be amended before the settlement instruction is released. Settling an incorrect price or ignoring the difference creates a loss or a reconciliation break that is harder to resolve later.

Question 27Trade execution, confirmation and affirmation

Which of the following is an allocation instruction rather than a confirmation?

  1. A message confirming the ISIN of the traded security
  2. A message splitting one executed block order across several underlying client accounts Correct answer.
  3. A message notifying the client of the commission charged on a trade
  4. A message stating the settlement date agreed for a single trade

Explanation

Allocation is the process of distributing a block execution across the underlying accounts that participated in the order, and it is communicated to the broker separately from the confirmation. Settlement date, commission, and security identifiers are elements of the confirmation itself.

Question 28Trade execution, confirmation and affirmation

Which reference data element is essential on a confirmation to allow the counterparties to agree exactly which security was traded?

  1. The issuer's registered office address
  2. The client's marketing classification
  3. The security identifier such as ISIN together with the quantity and price Correct answer.
  4. The name of the exchange's chief executive

Explanation

A confirmation must identify the instrument unambiguously, typically through an ISIN, and state quantity and price so both sides can verify the economic terms. Addresses, executive names, and marketing classifications do not identify the security traded.

Question 29Trade execution, confirmation and affirmation

A trade is executed on a Friday in a market settling T+2. Which settlement date should appear on the confirmation, assuming no holidays intervene?

  1. The following Wednesday
  2. The following Tuesday Correct answer.
  3. The following Monday
  4. The following Thursday

Explanation

T+2 counts two business days forward from trade date, so a Friday trade settles on the following Tuesday when Saturday and Sunday are not business days. Monday would be T+1 and Wednesday would be T+3.

Question 30Trade execution, confirmation and affirmation

Why do many institutional clients use a standing settlement instruction (SSI) reference in the confirmation process?

  1. It replaces the need for any confirmation to be issued
  2. It guarantees the trade will settle on trade date
  3. It allows the broker to embed the client's standard cash and custody details so settlement instructions can be generated automatically Correct answer.
  4. It removes the need for the client to affirm the trade

Explanation

An SSI records the client's standard settlement accounts and custodians, allowing the broker to populate settlement instructions without repeated manual input. It does not eliminate the confirmation or affirmation obligation, nor does it change the settlement cycle.

Question 31Trade execution, confirmation and affirmation

What is the principal risk to a firm that fails to affirm its trades promptly before the settlement cut-off?

  1. The broker is obliged to absorb any loss on the trade
  2. The firm loses its regulatory licence to trade equities
  3. Settlement may fail, exposing the firm to buy-in risk, funding costs, and penalties Correct answer.
  4. The trade is automatically cancelled by the exchange

Explanation

Late affirmation delays the release of settlement instructions, which can cause a settlement fail and trigger buy-in, funding, and regulatory penalty consequences. The trade is not automatically cancelled, and the broker does not generally absorb the client's loss.

Question 32Trade execution, confirmation and affirmation

In the context of trade enrichment, what does the term 'enrichment' most commonly refer to?

  1. Applying a mark-up to the commission rate
  2. Converting the trade from a buy into a sell
  3. Increasing the trade size after execution to obtain a better average price
  4. Adding reference and standing data, such as identifiers and settlement details, to a trade record before it is confirmed Correct answer.

Explanation

Enrichment is the process of appending reference data, counterparty details, and settlement information to the raw execution record so downstream confirmation and settlement can proceed. It does not alter the economic terms of the trade.

Question 33Trade execution, confirmation and affirmation

Which message standard is most widely used for electronic trade confirmations between institutional counterparties?

  1. ISO 20022 securities messages such as the settlement and confirmation message set Correct answer.
  2. Comma-separated email attachments
  3. Printed paper tickets delivered by courier
  4. HTTP web page forms

Explanation

ISO 20022 provides structured, standardised message definitions used for securities confirmations and settlement instructions between institutions. Paper, email attachments, and web forms are not structured interbank messaging standards.

Question 34Trade execution, confirmation and affirmation

A broker executes a block trade for an investment manager and sends a single confirmation for the full block. The manager needs the trade split across three underlying funds. What should happen next?

  1. The manager should cancel the block and re-execute three separate orders
  2. The manager should ask the custodian to split the confirmation without informing the broker
  3. The manager should send allocation instructions to the broker so separate confirmations are generated for each fund Correct answer.
  4. The manager should settle the whole block in one fund and reallocate internally afterwards

Explanation

Allocation instructions tell the broker how to split the block across underlying accounts, after which separate confirmations are issued for each fund. Settling in one fund and reallocating internally distorts each fund's records and is not the correct process.

Question 35Trade execution, confirmation and affirmation

Which of the following best explains why same-day affirmation (SDA) reduces operational risk?

  1. It guarantees the client a better execution price
  2. It transfers settlement risk to the central counterparty in all cases
  3. It ensures trade details are agreed on trade date, so settlement instructions are released earlier and fails are reduced Correct answer.
  4. It eliminates the need for a central securities depository

Explanation

Same-day affirmation means discrepancies are identified and corrected on trade date, so accurate settlement instructions reach the custodian earlier. This reduces the likelihood of fails and the associated costs; it does not affect execution price or remove the need for a depository.

Question 36Trade execution, confirmation and affirmation

When a confirmation is disputed, which control is most effective at preventing the trade from settling on incorrect terms?

  1. Allowing the trade to settle and correcting it in the next monthly statement
  2. Increasing the trade's commission to offset the risk
  3. Relying on the custodian to detect the error at the settlement date
  4. Blocking release of the settlement instruction until the discrepancy is resolved and the confirmation is reissued Correct answer.

Explanation

Holding the settlement instruction until the disputed terms are corrected prevents an incorrect cash or securities movement. Relying on the custodian at settlement, or correcting after the fact, exposes the firm to loss and reconciliation breaks.

Question 37Trade execution, confirmation and affirmation

In a give-up trade, which party typically issues the confirmation to the executing client while the trade is ultimately cleared for a different clearing member?

  1. The executing broker, reflecting the give-up arrangement to the designated clearing member Correct answer.
  2. The stock exchange's listing department
  3. The clearing house directly to the client
  4. The custodian bank on behalf of the client

Explanation

In a give-up, the executing broker captures the trade and confirms it while identifying the clearing member to whom the trade will be given up for clearing. The clearing house and custodian do not issue the trade confirmation, and the listing department has no role.

Question 38Trade execution, confirmation and affirmation

A confirmation received by a client shows the correct ISIN and quantity but the settlement date is one day later than the client's own records. What is the most likely consequence if this is not corrected?

  1. The security will be re-registered in the client's name on the wrong date
  2. The commission will be recalculated automatically
  3. The client and broker may release settlement instructions for different dates, causing a fail on the earlier date Correct answer.
  4. The trade will be cancelled automatically by the broker

Explanation

A settlement date mismatch means the two parties instruct their custodians for different days, so one side will not receive or deliver on time and a fail is likely. The broker does not automatically cancel the trade, and the mismatch does not affect registration or commission calculation.

Question 39Trade execution, confirmation and affirmation

Which party in the post-trade chain is responsible for affirming an institutional trade on behalf of the underlying client?

  1. The client or its appointed investment manager acting under authority Correct answer.
  2. The central securities depository
  3. The settlement agent of the exchange
  4. The executing broker

Explanation

Affirmation is the act of the client, or an investment manager authorised to act for it, agreeing that the confirmed trade details are correct. The broker issues the confirmation, while the depository and exchange agents handle clearing and settlement infrastructure.

Question 40Trade execution, confirmation and affirmation

Which practice best supports straight-through processing (STP) in the confirmation and affirmation workflow?

  1. Use of standard electronic messages with validated reference data and automatic matching Correct answer.
  2. Reconciling trades only at month-end
  3. Manual re-keying of trade details into the client's order management system
  4. Faxing confirmations to the client for signature and return

Explanation

STP depends on structured electronic messages, validated reference data, and automatic matching so that trades flow from execution to settlement without manual intervention. Manual re-keying, faxes, and month-end reconciliation all introduce breaks and delay.

Question 41Trade execution, confirmation and affirmation

A client's order management system automatically matches incoming confirmations against its own trade records and flags only mismatches for review. What is this control commonly called?

  1. Automatic confirmation matching with exception-based review Correct answer.
  2. Pre-trade compliance checking
  3. Best execution monitoring
  4. Margin collateral optimisation

Explanation

Automated matching compares the confirmation to the client's internal record and routes only exceptions to staff for investigation. Pre-trade compliance, best execution, and margin optimisation address different regulatory and funding objectives.

Question 42Trade execution, confirmation and affirmation

Which factor most increases the likelihood of a confirmation discrepancy in a cross-border equity trade?

  1. The presence of a standing settlement instruction for the client
  2. Differences in local market conventions, such as settlement cycles and tax treatment, between the two parties Correct answer.
  3. The use of a single common messaging standard by both parties
  4. Execution on a regulated exchange

Explanation

Cross-border trades are more prone to discrepancies because settlement cycles, tax withholding, and local conventions can differ between markets. Common messaging standards, SSIs, and regulated execution all tend to reduce rather than increase the risk of mismatch.

Question 43Trade execution, confirmation and affirmation

Why is it important that a confirmation records the capacity in which the broker acted, such as principal or agent?

  1. It clarifies the legal relationship between the parties and who bears counterparty obligations Correct answer.
  2. It sets the exchange's trading fees
  3. It determines the settlement date of the trade
  4. It fixes the ISIN of the security

Explanation

Stating whether the broker acted as principal or agent identifies the legal counterparty and the obligations that follow, which matters for disputes and for settlement. It does not determine settlement date, exchange fees, or the security identifier.

Question 44Trade execution, confirmation and affirmation

A client wishes to reduce the time between execution and affirmation. Which combination of measures is most effective?

  1. Deferring all matching to the settlement date to allow prices to settle
  2. Enriching trade data automatically, matching electronically on trade date, and responding to exceptions within the same day Correct answer.
  3. Relying on the broker to affirm on the client's behalf
  4. Waiting for paper confirmations and posting them to the client

Explanation

Fast affirmation comes from automatic data enrichment, electronic matching on trade date, and prompt resolution of exceptions. Paper-based processes, deferred matching, and reliance on the broker all extend the affirmation timeline.

Question 45Clearing, settlement and the settlement cycle

In a standard T+2 settlement cycle, a trade executed on Wednesday is normally due for settlement on which day?

  1. Friday Correct answer.
  2. Monday
  3. Wednesday of the following week
  4. Thursday

Explanation

T+2 counts two business days forward from the trade date, so a Wednesday trade settles on Friday provided neither day is a market holiday. Trade date itself is day zero and is not counted as one of the two days.

Question 46Clearing, settlement and the settlement cycle

Which party typically acts as the central counterparty that interposes itself between buyer and seller once a trade is novated?

  1. The custodian bank
  2. The stock exchange listing authority
  3. The central securities depository
  4. The central counterparty clearing house Correct answer.

Explanation

Novation transfers the trade to a central counterparty clearing house, which becomes buyer to every seller and seller to every buyer. This mutualisation of counterparty risk is the defining function of central clearing.

Question 47Clearing, settlement and the settlement cycle

What is the primary purpose of a delivery-versus-payment mechanism in securities settlement?

  1. To permit the buyer to defer payment until the securities are resold
  2. To enable the seller to retain legal title until the next coupon date
  3. To guarantee that transfer of securities occurs only if the corresponding cash payment occurs Correct answer.
  4. To allow settlement to take place without any cash movement between the parties

Explanation

Delivery-versus-payment links the securities leg and the cash leg so that neither can complete without the other. This removes principal risk, the danger that one party delivers and the other fails to pay or deliver.

Question 48Clearing, settlement and the settlement cycle

A settlement fails to occur on the contractual settlement date. Under the standard industry convention, what is this event called?

  1. A short sale
  2. A corporate action
  3. A failed trade Correct answer.
  4. A buy-in

Explanation

When delivery or payment does not occur on the intended settlement date, the trade is described as failed. The term covers both failure to deliver securities and failure to pay cash on the due date.

Question 49Clearing, settlement and the settlement cycle

Which record date convention determines entitlement to a cash dividend?

  1. The date on which the issuer announces the dividend
  2. The date on which holders must be registered to receive the dividend Correct answer.
  3. The date on which the exchange admits the shares to trading
  4. The date on which the dividend is actually paid to holders

Explanation

The record date is the point at which the register is struck to establish who is entitled to the distribution. Holders registered as of that date receive the dividend regardless of when payment is made.

Question 50Clearing, settlement and the settlement cycle

In a rolling settlement model, what does the term 'T' represent?

  1. The final payment date
  2. The trade execution date Correct answer.
  3. The last day of the month
  4. The date the security is listed

Explanation

In rolling settlement notation, T denotes the trade date on which the transaction is executed. Settlement is then expressed as a number of business days after T, such as T+1 or T+2.