Settlement Service Providers & Methods of Settlement

The Depository Trust & Clearing Corporation, with its subsidiary the National Securities Clearing Corporation, was established in 1976 with the goal of eliminating the need for paper certificates for clearing and settlement of broker-to-broker trades. The DTCC provides clearing, settlement, and guarantee-of-completion for transactions in equities, ETFs, UITs, corporate and municipal debt securities.
Available through the DTCC are services including:
•    ACATS
•    Continuous Net Settlement (CNS)
•    Trade Comparison and Reporting
•    Settlement Services
•    Stock Borrow Program

Like FINRA, the Depository Trust & Clearing Corporation and National Securities Clearing Corporation are registered with the SEC as SROs. The Depository Trust & Clearing Corporation has 10 subsidiaries. Each one serves a different segment or pur¬pose for the securities industry, including:
•    National Securities Clearing Corporation (NSCC)
•    Depository Trust Company (DTC)
•    Fixed Income Clearing Corporation (FICC)
•    DTCC Derivatives Repository Ltd.

Methods of Settlement

Regular Way
For example, the regular way of settling a transaction is known as regular-way settlement. Some securities settle regular way at T + 2. Others settle regular way at T + 1. A T + 2 settlement means if the customer buys stock Tuesday, the trade settles Thursday. If the security settles regular-way at T + 1, the trade settles Wednesday.

As with wire transfers through a bank, weekends and holidays are not counted. If a trade is executed Friday, it settles Monday, unless Monday is a holiday, at T + 1. A trade entered Friday settles at T + 2 on Tuesday.
To a customer, settlement refers to the day the funds become available for withdrawal for the sell-side. The buy-side must make full payment by settlement. Some broker-dealers allow buyers to pay for the transaction after it is entered. Many require the funds to be available when the trade is entered. Either way, full payment must be made by the settlement date to keep things running smooth.

Cash Settlement
A cash settlement settles "same day," meaning the day it is traded is the day it settles. If the trade happens before 2:00 p.m., it settles by 2:30 p.m. If the trade happens after 2:00 p.m., it settles within 30 minutes.

Next Day
For a next-day settlement, the cash and securities must be available by the next day following the trade. Another way of saying next-day is "T + 1." Securities that settle regular-way at T + 1 include Treasury securities and options.

Seller's Option
The seller's option is used when the seller likes the price he can get today but for whatever reason won't be able to come up with the securities for a while. In this case the seller specifies the date on which he will be able to deliver the securities and may not deliver sooner than the third business day following the trade. If the seller specifies a certain date but ends up wanting to deliver the securities earlier, he must give the buyer a one-day written notice of his intention.

Buyer's Option
The buyer could also specify the date when payment will be made for securities and accept delivery, which is known as a buyer's option.

Certain institutional accounts avoid the risk of delivering securities before payment has been made by setting up a DVP/RVP account that uses Delivery Versus Payment settlement. As the name implies, payment must be made when or before the securities purchased are delivered. That is from the buyer's perspective. From the seller's perspective, the process is Receive Versus Payment. The DVP system ensures that securities will be delivered only if payment is made.

When-, As-, and If-Issued Contracts
New offers of municipal securities are frequently sold to investors before the securities have been issued. In these transactions, investors receive when-, as-, and if-issued confirmations. The confirmations must contain a description of the security with the yield to the customer and the trade date.
Because the securities have not been issued, the settlement date is not known. There¬fore, if there is accrued interest due to the underwriters, the total price cannot yet be determined. When the bonds are issued, investors receive updated confirmations showing the settlement date and the total purchase price.


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