Welcome to Settlement and Clearance: the rules that govern how a trade moves from execution to delivery and payment. This unit is the post-trade operations core of Function 4 on the Series 24 exam.
Exam Weight: Part of 21% (~32 questions across Function 4)
What You'll Learn
In this unit, you'll cover:
- UPC Scope and Clearing Infrastructure: How the Uniform Practice Code governs broker-to-broker (street-side) transactions, the carve-outs for clearing-agency-settled trades, exempted securities, municipals, and direct participation programs (DPPs), and the mandatory use of a registered clearing agency (typically NSCC) with continuous net settlement (CNS)
- Comparisons, Confirmations, and DK Notices: The Uniform Comparison/Confirmation that must be exchanged by the end of the trade date, and the Don't Know (DK) notice procedure that gives the contra-member one business day to confirm or DK a trade for which no comparison came back
- Settlement Cycle and Dates of Delivery: The T+1 standard cycle (shortened from T+2), the firm-commitment 4:30 p.m. ET carve-out (T+2), the cycle exemptions for government securities, municipals, and commercial paper, the same-day allocation/affirmation requirement, and the three trade types (cash, regular way, seller's option)
- Good Delivery: Round-lot units of delivery (100 shares for stocks, $1,000 par for bonds), assignment and signature-guarantee requirements, the rules for mutilated certificates, and the strict prohibition on delivery from deceased registered owners
- Bond Settlement: Accrued Interest, Due-Bills, Claims, and Transfer Fees: The 30/360 day-count convention for accrued interest, the due-bill mechanism for distributions on late-transferred securities, dividend/rights claims, and the rule that the party requesting the transfer pays the transfer fees
- Marking to the Market: The inter-member mark-to-market deposit demand on uncompleted contracts, the difference from customer margin requirements, and the close-out consequence of failing to deposit
- Close-Out: Buy-Ins, Sell-Outs, Reclamation, and COD Orders: The buy-in procedure (buyer's remedy for seller fail; 12:00 p.m. ET, two business days notice), the sell-out procedure (seller's remedy for buyer fail; no notice required), the 15-day / 45-day / 30-month reclamation windows, and the COD / delivery versus payment (DVP) / receive versus payment (RVP) order requirements
Why This Matters
The Series 24 exam tests three principal-level questions on this material:
- Whether the firm has operational infrastructure in place: a clearing-agency membership (or correspondent arrangement), a comparison/confirmation system that meets the comparison-and-confirmation deadlines, and procedures to issue DK notices when comparisons go missing
- Whether the firm meets the regulatory deadlines that drive settlement: T+1 settlement, same-day affirmation, and the buy-in notice deadline of 12:00 p.m. ET, two business days before execution
- Whether the firm resolves fails correctly when delivery breaks down: marking to the market, buy-ins, sell-outs, and the recordkeeping that documents each step
A firm that pushes settlement past T+1 without a permitted exemption violates the standard settlement cycle. A firm that issues a buy-in notice the same morning as execution violates the two-business-day notice rule.
A firm that carries a comparison discrepancy with the contra-broker, without the party in error sending a corrected comparison, has unresolved settlement exposure on the books. The exam pairs these because the rulebook does.
Let's start with the structural framework: which transactions the Uniform Practice Code actually governs and how clearing agencies fit in.