Trading, Clearing, Settlement and Post-Trade Processing
What this domain tests
The exam checks that you understand the full trade lifecycle: how an order becomes an executed trade, how a CCP interposes itself, and how securities and cash finally exchange. Expect questions on order types, settlement-date arithmetic, dividend entitlement around the ex-date, and the consequences of a failed settlement.
Core rules and concepts
- Order types: market, limit, stop, fill-or-kill, immediate-or-cancel, iceberg. Price-time priority governs matching on order-driven books; best execution is an outcome obligation, not simply best price.
- Clearing: the CCP novates the trade, becoming buyer to every seller and seller to every buyer, then nets exposures and collects initial and variation margin plus default-fund contributions.
- Settlement: delivery versus payment (DVP) links the securities leg and cash leg so neither happens without the other. Free-of-payment transfers exist but carry principal risk.
- Cycles: the US moved to T+1 on 28 May 2024; the UK and EU remain on T+2.
- Fails: non-delivery triggers cash penalties, and in some regimes a buy-in to source the securities.
Worked example
You buy 1,000 shares at £10.00 on Wednesday under T+2; settlement is Friday, when you pay £10,000 and receive the shares DVP. The record date for a dividend is Friday and the ex-date is Thursday. Your Wednesday purchase is cum-dividend and settles on the record date, so you are on the register and receive the dividend. A buyer on Thursday trades ex-dividend, settles Monday, and is not on the register on Friday.
Traps that cost marks
Trade date is not settlement date; entitlement and cash flow follow different dates. A CCP reduces counterparty risk but does not remove market risk. Best execution is not a guarantee of the best price on every order. Short sales generally require a locate or borrow before execution.