The series 99 exam can be challenging for many operations professionals. Here are 20 terms and concepts you must know to pass the series 99 exam.
Prior to executing a customer’s order the representative must fill out the appropriate order ticket and present it to the trading department or wire room for execution. All order tickets will include:
Buy or Sell Name of security Number of shares or bonds Account name and number Account type, i.e. cash or margin Price and time limits if any Solicited or unsolicited Discretionary authority exercised or discretionary authority not exercised, if applicable Time stamp when entered, executed, changed, or canceled
Executing an Order
An important part of executing a customer’s order lies in the operational procedures that route the order to the markets and handle trade input functions for the order once it has been executed. The brokerage firm assigns specific departments to handle all of the important functions of trade execution and input. The departments are:
Sales Department Order Room / Wire Room Purchase and Sales Department Margin Department Cashiering Department Custody Department Corporate Action Department
The sales department is where registered representatives interact with the investing public. Representatives work with individual and institutional investors, manage portfolios, make recommendations and accept orders.
Order Room / Wire Room
Once a representative has received an order from a client, the representative must present the order for execution to the order room. The order room will promptly route the order to the appropriate market for execution. Once the order has been executed, the order room will forward a confirmation of the execution to the registered representative and to the purchase and sales department.
Purchase and Sales Department
Once the order has been executed the purchase and sales department inputs the transaction to the customer’s account. The purchase and sales department sometimes called P & S are also responsible for mailing confirmations to the customer and for all billing.
All transactions, regardless of the type of account, are sent through the margin department. The margin or credit department calculates the amount of money owed by the customer and the date when the money is due. The margin department will also calculate any amount due to a customer.
The cashiering department handles all receipts and distributions of cash and securities. All securities and payments delivered from clients to the firm are processed by the cashiering department. The cashiering department will also issue checks to customers and, at the request of the margin department, will forward certificates to the transfer agent.
The custody department maintains physical control of customer and firm assets. The custody department sometimes referred as the age safeguards the physical securities in the firm’s possession. Employees in the custody department will create stock records for each security in the firm’s control and will record which securities belong to the firm and which securities belong to customers. The box count of physical securities will take place in the custody department and any long or short differences in securities positions will be investigated by members of the custody department.
Corporate Action Department
The corporate action department handles communications between the investors and the issuers of securities. The corporate action department will mail proxies and prospectuses to beneficial owners of securities and handles mergers, reorganizations and name changes relating to issuers. The corporate action department also manages the collection of interest and dividend payments.
Becoming a Stockholder
While some people purchase the shares directly from the corporation when the stock is offered to the public directly, most investors purchase the shares from other investors. These investor-to-investor transactions take place in the secondary market on the exchange or in the over-the-counter market. Although the transaction in many cases only takes seconds to execute, trades actually take several days to fully complete. We will now review the important dates regarding transactions, which are done for a regular way settlement.
The trade date is the day when the order is actually executed. Although an order has been placed with a broker, it may not be executed on the same day. There are certain types of orders that may take several days or even longer to execute. A market order, however, will be executed as soon as it is presented to the market, making the trade date the same day the order was entered.
The buyer of a security actually becomes the owner of record on the settlement date. When an investor buys a security from another investor, the selling investor’s name is removed from the security and the buyer’s name recorded as the new owner. Settlement date is two business days after the trade date. This is known as T + 2 for all regular way transactions in common stock, preferred stock, corporate bonds, and municipal bonds. Government bonds and options all settle the next business day following the trade date. Any trade done on a cash basis settles on the same day regardless of the security involved in the transaction. Settlement dates are set by the Uniform Practice Code.
The payment date is the day when the buyer of the security has to have the money to the brokerage firm to pay for the purchase. Payment date for securities under the industry rules is four business days after the trade date, or T + 4. Payment dates are regulated by the Federal Reserve Board under Regulation T of The Securities Exchange Act of 1934. While many brokerage firms require their customers to pay for their purchases sooner than the rules state, the customer has up to five business days to pay for the trade.
If the customer fails to pay for the purchase within the four business days allowed, the customer is in violation of Regulation T. As a result, the brokerage firm will sell out and freeze the customer’s account. On the fifth business day following the trade date, the brokerage firm will sell out the securities that the customer failed to pay for. The customer is responsible for any loss that may occur as a result of the sell out and the brokerage firm may sell out shares of another security in the investor’s account in order to cover the loss. The brokerage firm will then freeze the customer’s account, which means that the customer must deposit money up front for any purchases they want to make in the next 90 days. After the 90 days have expired, the customer is considered to have reestablished good credit and may then conduct business in the regular way and take up to four business days to pay for their trades. A customer may get additional time to pay for the trade by requesting an extension. An extension request must be submitted to the NYSE or FINRA before the expiration of the fifth business day. A broker dealer may ignore a call for cash of $1,000 or less.
Clearly Erroneous Reports
If a registered representative reports the execution of a trade to a customer and that report is clearly an error, then that report is not binding on the agent or the firm. The customer must accept the trade as it actually occurred, not as it was erroneously reported so long as the transaction was in line with the terms of their order. A reporting error usually occurs verbally. However, occasionally the terms of the trade may be printed incorrectly on the customer’s confirmation. If the terms of the trade are reported incorrectly on the customer’s confirmation the firm will send the customer a corrected confirmation with the terms of the trade as the actually occurred by mail or email depending on how the customer elects to receive confirmations. If a trade is executed and the trade is posted to the wrong account the posting error will be corrected through the cancel and rebill process. Posting the trade to the wrong customer account or wrong account type such as cash or margin are typical errors. The cancel and rebill of the trade will generate confirmations for both accounts and all corrections must be approved by a principal.
If a transaction is executed away from a customer’s limit price or is executed for too many shares of stock, the customer in not obligated to accept the transaction. A trader or a registered representative who identifies or is informed of an execution error should immediately inform their principal of the error. All firms are required to maintain an error account to correct execution errors. The error account will be used to correct errors in price, quantity and type of execution (purchased shares that should have been sold or sold shares that should have been purchased). All trades corrected though the error account must be approved by a principal of the firm. The principal of the firm must monitor the error account closely to ensure that it is not being used by traders to hide losses or by registered representatives to hide customer losses.
While most transactions are automatically confirmed between the buying and selling firms through the DTCC some trades are still input manually for comparison. It is during this process where the details of the trade reported or input by one party may differ from the details of the trade recognized by the confirming party. These cases can result in trades being unconfirmed. If the firm receiving the details of the trade does not know the terms of the trade as reported there is an open trade or a DK. The confirming party is required to contact the reporting party by telephone promptly advising them that they do not know the terms of the trade as reported. This phone contact can often lead to a resolution of the unrecognized terms. The issues that may have resulted in the DK may have been a simple input error or typo. If however the terms of the trade remain unrecognized by the confirming party the confirming party is required to send a written notice return receipt requested to the reporting party within one business day. The reporting broker dealer is then required to send the confirming broker dealer a written notice questioning if a trade did in fact occur between the two parties for the security in question within four business days. If the confirming broker dealer believes that a trade took place but under different terms and conditions it must once again contact the reporting party by phone and send the reporting party a written notice within one business day failing to confirm the trade details as reported.
If either the reporting broker dealer or the confirming broker dealer believes that the trade was clearly erroneous it may cancel the trade by reporting it to FINRA and with FINRA’s approval. FINRA may also from time to time elect to cancel trades that it deems clearly erroneous. Most of these cancellations will be the result of trades being reported that are clearly unrelated to the market price of a security.
Corporate and Municipal Securities Settlement Options
Regular way transactions in corporate stocks and bonds and municipal bonds settle on the second business day or T+2. There are, however, times when either party to the transaction may request an alternative settlement. Other settlement options include:
Cash Next Day Seller’s Option Buyer’s Option RVP / DVP / COD
Cash: A transaction done on a cash basis settles the same day. A cash trade requires that the buyer have the funds available for payment and the seller to have the securities available for delivery on the day the trade is executed. Cash trades executed prior to 2:00 PM EST settle by 2:30 PM. EST Trades executed after 2:00 PM EST settle within 30 minutes.
Next Day: A transaction executed for a next day settlement requires that the buyer has the cash available for payment and the seller has the securities available for delivery on the next business day.
Seller’s Option: A seller who wishes to lock in a sale price for the securities but who, for some reason, is not able to deliver the securities, may elect to specify a seller’s option settlement. The seller may specify the date on which they will deliver the securities but may not deliver the securities any sooner than the fourth business day. If the seller wants to deliver the securities earlier then specified in the contract, they must give the buyer one day written notice of their intention to settle the trade early.
Buyer’s Option: A buyer may specify the date when they will make payment for the securities and accept delivery of the securities, much the same as a seller’s option. RVP / DVP / COD
Many trusts and other fiduciaries will not allow cash to be paid out until the securities they purchased are delivered. Alternatively, in the case of a sale, they will not allow the securities to be delivered until payment is received. A bona fide RVP / DVP account will allow a transaction to settle no sooner than regular way of T+2 but no later than 35 calendar days. The account is given up to 35 days to settle the transaction. In the case of a purchase, the securities have to be registered in the buyer’s name by the transfer agent and delivered. If the account is selling securities the transaction will settle regular way T+2.
If a broker dealer sells securities for a customer who has physical possession of the certificate the broker dealer must establish a receivable for the customer’s account and will credit the sales proceeds to the customer’s account when the certificate is delivered. When Issued Securities
When Issued Securities
When a corporate issuer declares a stock split, the stock will trade in the market place on a when-issued basis, prior to the distribution of the new shares. Sellers of the stock during this time may sell the stock on a when-issued basis or may deliver the old securities with a due bill attached for the new shares. Corporate securities sold on a when-issued basis will normally settle three business days after the securities are issued. Municipal securities that are sold prior to the certificate being available for delivery are sold on a when-issued basis. The purchaser will receive a when-issued confirmation and a final confirmation three days prior to the certificate’s delivery.
If you have mastered the above terms and concepts you are on your way to passing the series 99 exam.