Introduction

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 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 first business day after trade date (or the trade day itself for cash trades), and the Don't Know (DK) notice procedure that gives the contra-member one business day to confirm or reject a disputed trade
• Settlement Cycle and Dates of Delivery: The T+1 standard cycle effective May 28, 2024, 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/DVP-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 or disputed
• 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 accepts a comparison disputed by the contra-broker without resolving it or issuing a DK notice 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.