Settlement process - U.S.A.
A transfer of securities, both in DTC and in FED, is initiated by a single delivery instruction. As a consequence, there is no matching of delivery and receipt instructions on the U.S. market in DTC or FED.
However, for transactions settled in DTC against payment, DTC provides an affirmation process which is equivalent to a matching facility. Provided that both sets of instructions match, the custodian will electronically affirm the broker's confirmation on the ID system. Affirmed ID confirmations will result in an automated settlement in DTC's books, with no need for the delivering party (that is, the broker or the custodian as the case may be) to input additional separate delivery instructions.
In addition, DTC has launched a “Settlement Matching” initiative whereby certain deliveries are subject to approval by the receiving party before settlement.
The settlement cycle in the US is T+2 for equities, corporate bonds, municipal bonds, unit investment trusst (UIT) and T+0 or T+1 for Money Market Instruments and Government Securities.
Both against and free of payment settlement are supported by DTC and Fedwire Securities Services.
For DVP settlement, securities and cash provisionally settle simultaneously during the day. The delivery and receipt of securities and cash are effective upon booking on the DTC account. Securities and funds are available for additional settlement, but cash is only available for withdrawal until net end of day cash settlement through the Fedwire system.
FedWire Securities settlement
Transactions are effected via book entry simultaneously throughout settlement date.
- For settlement in DTC and NSCC, the cash settlement is performed at the end of the processing day, on a net basis.
- For settlement in Fedwire Securities, the cash settlement is performed transaction by transaction during the day.
In both cases, central bank money is used to settle the cash transaction.
Delivery of securities or cash may be reversed by the buyer/recipient. There is no limitation on the reversal time frame. However, most securities reversals (referred to as the "Don't Know" - DK procedure) take place on settlement day.
Under the DTC “Settlement Matching” initiative, certain deliveries are now subject to approval by the receiving party before settlement, using the DTC RAD function. Once approved and settled in DTC, the transaction can no longer be “DK'ed” by the receiving party.
Deliveries that are subject to RAD approval are as follows:
- All against-payment deliveries with a countervalue above USD 0.01;
- Free of payment deliveries on DTC-eligible Money Market Instruments (MMIs).
Note: Although these transactions can no longer be DK'ed, DTC still allows receiving counterparties to request a return of a previously settled position after the initial settlement, but, contrary to DK, such return request is subject to the prior approval of the original delivering counterparty.
Book-entry securities held in DTC are registered in the nominee name of DTC, Cede & Co., and held in the account of the broker or custodian that is the DTC member.
Physical registered securities must be forwarded to the corporation's transfer agent to change the evidence of ownership on the legal records of the issuing corporation.
The issuing corporation generally appoints a transfer agent, a bank or trust company to perform the registration. Some large corporations perform this function themselves. Transfer agents must complete a transfer according to rules set forth by the SEC. For most securities, the re-registration should be processed within three business days after receipt.
Nominee registrations are used by banks, brokers, mutual funds and other financial institutions to minimise re-registration of securities and speed the delivery and settlement process.
Stamp duty is not applicable in the U.S. market.
Rules and procedures for buy-ins vary according to the type of market, security and settlement system in which the failing trade is processed. We therefore recommend to refer to each institution’s rules and regulations.
TMPG Fails Charge Trading Practice
The Treasury Market Practices Group (TMPG) and the Securities Industry and Financial Markets Association (SIFMA) have published a Trading Practice to provide a standard procedure that market participants may elect to use to assess and pay "fails charges" for certain delivery failures in the market for U.S. Treasury securities.
The purpose is to preserve and enhance the efficiency and operational integrity of the marketplace for Treasuries by reducing the incidence of delivery failures.
Securities lending and repo market
Securities financing/lending is a common practice in the U.S. market. The terms of the loan is governed by a "Securities Lending Agreement". Under U.S. law, the borrower must provide the lender with collateral in the form of cash, government securities or a letter of credit. As payment for the loan, the parties negotiate a fee, quoted as an annualised percentage of the value of the loaned securites.
Repurchase agreements are also widely used in the U.S.A. Foreign investors can participate in the local repo market without restrictions.