Clearing, Settlement and Custody
Clearing and settlement
Clearing determines obligations; settlement discharges them. MSCHCD matches trades, nets obligations where the rulebook permits, and supports book-entry delivery versus payment (DVP). Custody is separate: safekeeping, segregation, nominee holdings, corporate-action processing and reconciliation.
Core rules
- Book-entry securities are transferred by account entry, not physical delivery.
- DVP links securities delivery to cash payment to reduce principal risk.
- Client assets must be segregated from broker or custodian assets.
- Settlement fails trigger buy-in, cash compensation or disciplinary action under the rulebook.
- Record dates determine entitlement to dividends, votes and rights.
Worked example
An investor buys 1,000 shares at MNT 1,000 on trade date T. Under a T+2 cycle, settlement is two business days later. The buyer must have MNT 1,000,000 plus fees and the seller must deliver 1,000 shares. If the seller fails, MSCHCD may buy in the shares and charge the cost. The reasoning separates trade execution, clearing of obligations and final settlement.
Traps
- Using “clearing” and “settlement” interchangeably.
- Assuming the custodian is the legal registrar.
- Ignoring the record date for corporate actions.
- Treating client securities as available to cover the broker’s own obligations.
- Forgetting that failed settlement can create replacement-cost risk.