Settlement and Clearance

The whole unit on one sheet: what the UPC covers, comparisons and DK notices, the T+1 cycle, good delivery, bond settlement, marking to the market, and close-outs.

The One-Liners That Win Points

• The UPC governs OTC secondary-market trades BETWEEN members (street-side). It does NOT cover customer-facing confirmations, trades cleared through a registered clearing agency, exempted securities, municipal securities, mutual funds, or Direct Participation Programs (DPPs).
• Continuous net settlement (CNS) nets each member's buys and sells per security per day into one net obligation; the clearing agency (typically NSCC, the National Securities Clearing Corporation) becomes the central counterparty. The UPC is the fallback rulebook for ex-clearing trades.
• Corporate-debt OTC trades clear through a registered clearing agency unless both accounts are carried by the same carrying member (the thin carve-out).
• Both members send a Uniform Comparison/Confirmation. It carries trade date, settlement date, security, quantity, price, parties, and capacity.
• A DK notice is issued when a member has no record of the trade or disputes any term. The contra-member has one business day after receipt to confirm or DK; no response means the trade is treated as DK'd and the confirming member has no further liability.
• Regular way = T+1; cash = same day; seller's option = the option-expiration date.
• Firm-commitment offerings priced after 4:30 p.m. Eastern default to T+2. Most-tested carve-out.
• Good delivery = correct unit + proper assignment + authenticated if mutilated + not from a prohibited owner. One defect kills the delivery; the seller pays to fix defects.
• A buy-in is the BUYER's remedy for a seller's failure to deliver. A sell-out is the SELLER's remedy for a buyer's failure to accept.
• The mark-to-market rule is INTER-MEMBER on uncompleted contracts, not customer margin. The deposit equals the difference between contract price and current market price.

Numbers to Lock In

Top Gotchas

• Regular way is T+1, not T+2. T+2 was the prior standard; the current cycle is T+1 for equities and corporate bonds.
• Corporate and municipal bonds use the 30-day-month 30/360 convention; government securities use actual/actual. The exam gives a bond type and asks the day count.
• Accrued interest runs up to BUT NOT INCLUDING the settlement date (trade date for a cash trade).
• A DK notice is an inter-member concept only. There is no customer DK; a customer who disputes a confirmation files a complaint.
• The signature on an assignment must match the registered name exactly and be medallion-guaranteed. A genuine but unguaranteed signature is not good delivery.
• A certificate signed by a deceased registered owner is never good delivery. The estate must re-register to the executor first; the fiduciary exception covers securities already registered in the fiduciary's name (domestic issuer, guaranteed signature).
• A due-bill is required when a security is sold before going ex-distribution but transferred too late for the record date. Due-bill = stock dividend, scrip dividend, or rights; due-bill check = cash dividend, registered-bond interest, or UIT interest. Not transferable by the buyer.
• The transfer fee is paid by the party at whose instance the transfer is made (whoever requested it), not automatically the buyer or seller.
• Rights and warrants close-outs must be timed before the exercise period expires, or the value evaporates.

One-Breath Recap

The Uniform Practice Code is the street-side rulebook for OTC trades between members, and it steps aside whenever a registered clearing agency runs continuous net settlement or when municipals, exempted securities, mutual funds, or DPPs are involved. Members exchange Uniform Comparisons by the first business day after trade date, and a DK notice resolves any mismatch, with a one-business-day response window before the trade is treated as DK'd. Regular way settles T+1 (cash same day, firm-commitment deals priced after 4:30 p.m. Eastern default to T+2), good delivery demands the right unit plus a matching medallion-guaranteed assignment with the seller paying to cure defects, and bonds add accrued interest on 30/360 for corporates and municipals versus actual/actual for governments. Marking to the market lets a member demand a deposit on an uncompleted contract, and close-outs resolve fails: buy-ins by noon Eastern two business days out for a seller's failure to deliver, sell-outs same day with no advance notice for a buyer's failure to accept, and reclamation windows of 15 days, 45 days, and 30 months.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Settlement and Clearance unit for the complete lesson.