SETTLEMENT
Process objective
Ensure timely, accurate and secure transmission of trade instructions and timely completion of settlement
Process requirements
Trade instructions must be communicated to service providers efficiently. A service provider's processes should involve application of comprehensive automated tests as to accuracy and completeness on receipt of each instruction, with exceptions being reported to the client immediately and resolved in a timely manner. The service provider must pass all complete trade instructions to the appropriate sub-custodian promptly, by direct electronic communication where practicable. Pre-matching should be conducted (whether or not this is standard market practice) and exceptions pursued vigorously as the settlement deadline approaches. In the case of a trade which fails to settle on the due date, the service provider should pursue the matter vigorously. Trade status - and in particular exceptions - should be reported to clients with clarity and timeliness, preferably in real time.The late delivery of securities and late payment of cash often give rise to financial penalties or indirect costs (such as the loss of interest on funds). Many markets have an established mechanism for making a claim (a "market claim") so that the owner receives compensation for some of the associated costs. The service provider should take full responsibility for making all such claims and actively pursuing all unpaid claims.
Contractual Settlement
Many service providers offer "contractual settlement date accounting". This is a cash management tool: the client's cash account is credited with funds on a sale (and debited on a purchase) on the due settlement date in place of when a trade actually settles. This can greatly assist clients in managing available funds. An important downside is that "contractual settlement" masks settlement problems because it hides what is actually happening - so it is preferable for clients to be provided with information on actual settlement to monitor counterparty exposure and settlement performance.
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