Settlement

The whole unit on one sheet: the sequence from comparison to settlement, and the procedures that cure a trade that never completes.

Which One-Liners Win Points?

• Comparison is not settlement. Comparison proves the parties agree on the details. Settlement completes delivery and payment.
• Different reported details never make a match. A comparison shows agreement only when the required details agree.
• A clearing broker-dealer is not a clearing facility. The broker-dealer does the work for an introducing firm. The facility provides the processing channel.
• DVP is the delivering or selling side; receive versus payment (RVP) is the receiving or buying side. Same linked exchange, opposite views.
• The clearing agency is the contra party for every CNS position. A member faces the clearing agency, not the original counterparty.
• A net long is a fail-to-receive; a net short is a fail-to-deliver. An open position carries forward into the next day's netting.
• A don't know is about agreement; a fail is about delivery. The contra-member must confirm the trade before a delivery fail can exist.
• A buy-in date is an earliest execution date, not a deadline. The buyer may act, and is never forced to act.

Which Numbers Matter Most?

How Does CNS Turn Many Trades Into One Position?

• Enter the member's settling buys and sells for one security, add the position carried from the prior day, and net them.
• Net long: the clearing agency owes the security to the member.
• Net short: the member owes the security to the clearing agency.
• Flat: the obligations fully offset, so no quantity remains due.
• The clearing agency steps between the delivering and receiving members, so those members no longer face each other.

When May a Buyer Execute a Buy-In?

• Standard path: written notice to the seller first, then execution no sooner than the third business day after delivery was due.
• Cash or guaranteed delivery: execution the day after delivery was due, without prior notice. Notice of the executed buy-in is still required.
• Customer buyer: if a clearing corporation fails to deliver under a buy-in notice, close by cash purchase in the best available market, or by purchase for guaranteed delivery at the buyer's option. The purchase is for the account and liability of the party in default.

Which Gotchas Trip Students Up?

• Silence answers the notice. Under the alternative procedure, a lack of response counts as a don't know.
• The seller can block a buy-in. A request for proof of the fail obligation, or timely notice that a trading unit is in physical possession for prompt delivery, stops execution for those securities.
• The close-out deadline follows the source of the fail, not the security. Read why the participant failed before you pick a date.
• Only the deemed-owned delivery-restriction fail requires a purchase. The other categories permit a purchase or a borrow of like kind and quantity.
• Book-entry settlement is a customer-side duty. A customer DVP or RVP transaction in a depository-eligible security settles by book entry through a securities depository, subject to exceptions.

One-Breath Recap

Settlement runs in sequence: comparison proves the buyer and seller agree on the security description, the price, and anything else needed for agreement, then delivery versus payment links securities to money so neither side takes the other's credit risk, and continuous net settlement reduces each member's activity in one security to a single long or short position against the clearing agency, which becomes the contra party. When a trade stalls, match the problem to the cure: a don't know notice settles whether the trade happened at all, a buy-in lets a buyer close a seller's uncompleted contract, after written notice on the standard path, and a close-out binds the clearing-agency participant on a deadline set by the source of the fail.

Need more than the recap? Read the full Settlement unit.