Quick Answer
Continuous net settlement (CNS) combines each member's settling trades and prior open positions by security. When an obligation remains, the result is one net long or short position for that member and security. The clearing agency becomes the contra party. Inside CNS, an uncompleted delivery or receipt remains a fail position and carries into the next day's netting.
Use three questions to read a CNS record: Which security is involved, what net result follows, and does either party owe securities?
How Does CNS Turn Many Trades Into One Result?
CNS processes each member's activity separately for each security:
- Enter the member's settling purchases and sales for the security.
- Combine that activity with the closing position carried from the prior day.
- Net the amounts to determine the member's result for that security.
| Result | What it means |
|---|---|
| Net long position | The clearing agency owes the security to the member. |
| Net short position | The member owes the security to the clearing agency. |
| Flat | The obligations fully offset, so no security quantity remains due. |
CNS does not preserve a separate delivery obligation for every offsetting trade. It records one net result for that member and security. When an obligation remains, the result is a long or short position. A full offset leaves the member flat.
Why Does the Clearing Agency Become the Contra Party?
For a CNS transaction, the clearing agency steps between the delivering and receiving members when its guarantee becomes effective.
- The delivering member delivers securities to the clearing agency and receives payment from it.
- The receiving member receives securities from the clearing agency and pays it.
The original members no longer face each other for these CNS delivery and payment obligations.
Exam Tip: Gotchas
- The clearing agency is the contra party for every CNS position. A member's long or short position runs against the clearing agency, not against the original member on the other side of a trade.
What Happens When a CNS Position Fails?
An open CNS position records the unsettled quantity:
| Open position | CNS treatment |
|---|---|
| Long | The clearing agency still owes securities to the member. This is the member's fail-to-receive. |
| Short | The member still owes securities to the clearing agency. This is the member's fail-to-deliver. |
An open position carries forward and nets with the next day's settling trades.
Exam Tip: Gotchas
- A fail that remains in CNS stays an open net position. The position carries forward and joins the next day's netting until delivery or later activity reduces it.
What Should You Check on Exam Day?
- Net each member's activity by security into one long or short position when an obligation remains. Treat a full offset as flat.
- Treat the clearing agency as the contra party for every CNS position.
- Read an open long as a fail-to-receive and an open short as a fail-to-deliver.
- For a fail that remains in CNS, carry the open position forward and net it with the next day's settling trades.