This answer is written by AI. The information provided in this response is intended for general informational purposes only and should not be considered as legal advice. Do not rely solely on the information provided in this response for any legal decisions. Consult with a qualified legal professional before making any decisions.

What is the legal framework for securities clearing and settlement in the USA, and how does the DTCC handle settlement and fails to deliver?

Question from StopFTDs, What is the legal framework for securities clearing and settlement in the USA, and how does the DTCC handle settlement and fails to deliver?

Answer from AI:

Legal Framework for Securities Clearing and Settlement

In the United States, the legal framework for securities clearing and settlement is primarily governed by the Securities Exchange Act of 1934. This Act established the Securities and Exchange Commission (SEC), which is responsible for regulating the securities industry, including the clearing and settlement process.

The SEC has established rules and regulations to ensure the efficient and fair clearing and settlement of securities transactions. These rules include the requirement for clearing agencies to register with the SEC and to comply with certain standards of operation.

Role of the Depository Trust & Clearing Corporation (DTCC)

The Depository Trust & Clearing Corporation (DTCC) is a key player in the securities clearing and settlement process in the United States. The DTCC is a registered clearing agency with the SEC and provides clearing, settlement, and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments, and over-the-counter derivatives.

The DTCC operates through several subsidiaries, each of which handles different aspects of the clearing and settlement process:

  • The Depository Trust Company (DTC): The DTC provides depository and book-entry services for eligible securities, facilitating the transfer of securities in a safe and efficient manner.
  • National Securities Clearing Corporation (NSCC): The NSCC provides clearing, settlement, risk management, central counterparty services, and a guarantee of completion for certain transactions for virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment trusts.
  • Fixed Income Clearing Corporation (FICC): The FICC provides clearing and settlement for U.S. government securities and mortgage-backed securities.

Handling of Fails to Deliver

A “fail to deliver” occurs when a party fails to deliver securities that it has sold by the settlement date. The DTCC’s subsidiaries, particularly the NSCC, have procedures in place to handle fails to deliver.

Under NSCC rules, if a member fails to deliver securities on the settlement date, the NSCC will attempt to complete the settlement by purchasing the necessary securities in the market. If the NSCC is unable to purchase the securities, the transaction may be subject to a buy-in, where the buyer has the right to purchase the securities from another source and charge the seller for any difference in price.

Legal Advice and Further Information

The clearing and settlement of securities transactions can be a complex process, and the specific procedures can vary depending on the type of security and the circumstances of the transaction. Therefore, it is recommended that individuals or entities involved in securities transactions consult with a legal professional for personalized advice.

For further information, you can refer to the SEC’s rules and regulations on clearing and settlement, and the DTCC’s information on its businesses and subsidiaries.

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