Free CISI CMP Sec/Deriv Practice Questions: Securities: Clearing and Settlement

CISI means Chartered Institute for Securities & Investment. CMP means Capital Markets Programme, and this page is for the Securities/Derivatives unit. Use this focused CISI CMP Securities/Derivatives page as a short practice test for Securities: Clearing and Settlement. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Securities: Clearing and Settlement

A settlements analyst is reviewing a failed DVP settlement in a UK equity trade. The exception extract shows:

What is the best supported interpretation of the cause of the failed settlement?

• A. The seller is short of the shares needed to complete delivery.
• B. The trade has been instructed for the wrong settlement date under the stated settlement cycle.
• C. The buyer has insufficient sterling cash to fund the DVP purchase.
• D. The settlement instructions have not matched because the counterparty CREST member IDs differ.

Best answer: D

What this tests: Securities: Clearing and Settlement

Explanation: A failed or unsettled transaction should be diagnosed by checking the essential settlement inputs: agreed trade terms, matching instructions, available cash, available securities, and timing. In a DVP settlement, both the cash leg and securities leg must be capable of settling, but the settlement system also needs matching instructions from both sides. Here, the buyer has more cash than the settlement value, the seller has the full stock quantity, and the intended settlement date is consistent with the stated T+2 convention. The decisive fact is the settlement status: the counterparty CREST member IDs do not match. That points to an instruction or static-data error rather than a funding, stock, or settlement-cycle issue.

• A cash shortfall is not supported because £250,000 is available against a £190,000 settlement value.
• A stock shortage is not supported because the seller has the full 50,000 shares available.
• A timing error is not supported because Monday to Wednesday is T+2 and the exhibit states there is no market holiday.

The cash, stock, and timing facts support settlement, while the system status identifies an instruction mismatch.

Question 2

Topic: Securities: Clearing and Settlement

A client queries a recent UK equity purchase held through a broker.

Facts:

• 5,000 listed ordinary shares were bought on the London Stock Exchange at 248p.
• The trade matched and settled DVP through CREST on the intended settlement date.
• The broker holds the position in a pooled nominee account.
• No paper share certificate was issued to the client.
• The current screen price is 241p and the client says, “If I have no certificate and the price has fallen, how do I know I own the shares?”

What is the single best response?

• A. Ask the issuer to issue a paper certificate directly to the client before recognising any ownership.
• B. Use the current exchange quote as the main proof that the client owns the shares.
• C. Treat it as an ownership-evidence issue and check the nominee custody records and client holding statement, rather than the current market price.
• D. Treat it as a market-price dispute because the lower screen price indicates that the settlement record may be incorrect.

Best answer: C

What this tests: Securities: Clearing and Settlement

Explanation: A fall in the quoted market price affects the value of the holding, not whether the client has ownership evidence. In a UK broker nominee structure, the nominee is normally recorded as the legal holder, while the client has a beneficial interest recorded in the broker’s custody system. If the trade has settled DVP through CREST and the stock is held in a pooled nominee account, the relevant check is the custody or nominee record and the client holding statement. A paper certificate is not expected in this arrangement, and an exchange price is only a valuation input.

• A lower screen price may explain a lower valuation, but it does not by itself challenge settled ownership records.
• A paper certificate is not required where shares are held through a CREST nominee structure.
• A market quote helps value the position, but it is not evidence that a specific client owns it.

In a pooled nominee arrangement, the client’s evidence is the broker/custodian record of beneficial ownership, not a paper certificate or the current quoted price.

Question 3

Topic: Securities: Clearing and Settlement

A fund buys ABC plc shares for delivery versus payment.

Trade and settlement conventions:

• Trade date: Monday
• Settlement cycle: T+2, with no holidays
• Quantity: 250,000 shares
• Price: 412p per share
• DVP settlement amount is price times quantity; charges are handled outside settlement.

Settlement facts:

• Cash available on settlement morning: £1,350,000
• Instruction sent: Tuesday at 15:10
• Market instruction deadline: Wednesday at 11:00
• ISIN, quantity, counterparty and intended settlement date match the counterparty record.
• Client instruction amount: £1,300,000
• Counterparty instruction amount: £1,030,000

What is the most likely cause of the failed settlement?

• A. The settlement instruction was submitted after the market deadline.
• B. The client had insufficient cash to settle the purchase.
• C. The client instruction used an incorrect settlement amount; 250,000 shares at 412p equals £1,030,000.
• D. The client was short of ABC plc shares and could not deliver them.

Best answer: C

What this tests: Securities: Clearing and Settlement

Explanation: For a DVP equity purchase, the buyer must have cash available and matching settlement instructions. The cash consideration is calculated from the trade quantity and price. Since 412p is £4.12, the correct settlement amount is 250,000 × £4.12 = £1,030,000. The client has £1,350,000 available, so cash is not the problem. The trade date is Monday with T+2 settlement and no holidays, so Wednesday is the correct settlement date, and the instruction was sent before Wednesday’s deadline. As the ISIN, quantity, counterparty and date match, the remaining decisive mismatch is the cash amount on the client’s instruction.

• Cash insufficiency fails because the client has more than the correct £1,030,000 settlement amount available.
• Late instruction fails because the instruction was sent on Tuesday, before the Wednesday deadline.
• A securities shortage is not the issue for a buyer receiving shares under DVP.

The correct DVP cash amount is £1,030,000, so the £1,300,000 instruction creates a settlement matching failure.

Question 4

Topic: Securities: Clearing and Settlement

A bank’s operations team has four spot FX trades due to settle on the same value date. All currencies are CLS-eligible and all counterparties can settle through CLS. The team wants to reduce principal settlement risk and minimise sterling cash funding.

Ignoring fees and intraday timing, which post-trade arrangement best meets the objective?

• A. Use a stock borrowing arrangement and provide £2.8 million as sterling collateral.
• B. Settle bilaterally through correspondent banks and fund the £13.0 million gross sterling payable legs.
• C. Settle through CLS using payment-versus-payment and fund the £2.8 million net sterling debit.
• D. Use a central securities depository DVP process and fund the £2.8 million net sterling debit.

Best answer: C

What this tests: Securities: Clearing and Settlement

Explanation: CLS is designed for eligible FX settlement and reduces principal risk by using payment-versus-payment, so one currency leg is not finally paid without the corresponding currency leg. It also reduces liquidity needs through multilateral netting by currency. For the sterling legs, the bank must pay £8.0 million and £5.0 million, a total of £13.0 million. It will receive £3.2 million and £7.0 million, a total of £10.2 million. The net sterling debit is therefore £2.8 million. The bank would still manage any net debit in other currencies, but for the sterling funding need, CLS is the appropriate post-trade arrangement.

• Bilateral correspondent-bank settlement uses the gross sterling payable amount and does not give the same PvP risk reduction.
• A central securities depository DVP process is for securities against cash, not settlement of spot FX cash legs.
• Stock borrowing helps cover a securities delivery shortfall; it does not settle FX trades on a PvP basis.

CLS provides PvP FX settlement and nets the sterling legs, so £13.0 million payable less £10.2 million receivable leaves £2.8 million to fund.

Question 5

Topic: Securities: Clearing and Settlement

A UK investment firm holds listed equities for institutional clients through a pooled nominee account with a third-party custodian. The firm also has a separate house account for its own trading book with the same custodian.

A FTSE-listed issuer announces a 1-for-5 rights issue. Entitlements depend on holdings at the record date, and several clients traded the shares around the ex-date with some unsettled trades still open.

Which control would most directly support accurate custody records, correct entitlement processing, and segregation of client assets?

• A. Require two authorised operations staff to approve each client’s rights issue election before submitting it to the custodian.
• B. Perform a daily reconciliation of the custodian/CREST position, the internal client sub-ledger, and client-versus-house account designations, resolving breaks before allocating rights.
• C. Update the corporate actions diary when the issuer circular is received and send the event details to portfolio managers.
• D. Review the firm’s equity order-routing policy to confirm that trades around the ex-date met best execution requirements.

Best answer: B

What this tests: Securities: Clearing and Settlement

Explanation: For nominee holdings, the firm’s internal records must identify the beneficial client positions even though legal title may sit with a nominee or custodian. A rights issue makes record-date accuracy especially important because entitlements are calculated from the securities position, adjusted for relevant settled and unsettled activity according to the firm’s processing rules. The most relevant control is therefore a reconciliation between external custody records and the firm’s internal client records, including checks that client assets are not mixed with the firm’s house position. Resolving breaks before entitlement allocation reduces the risk of over- or under-crediting clients and supports proper asset segregation.

• Dual approval of election instructions helps prevent processing errors after entitlements are known, but it does not prove the underlying client positions are accurate.
• Best execution review concerns trade execution quality, not custody accuracy or corporate action allocation.
• A corporate actions diary and notification process are useful for event awareness, but they do not verify holdings or segregation.

A position and designation reconciliation directly confirms what is held, for whom it is held, and which clients should receive rights entitlements.

Question 6

Topic: Securities: Clearing and Settlement

A broker has the following equity trades in the same CREST-settled security, all for the same settlement date. Brokerage, stamp duty and other fees are ignored.

The counterparties have already agreed the price, quantity and settlement date. The operations system is now offsetting the broker’s buy and sell obligations before delivery-versus-payment settlement.

Which process is being performed, and what is the broker’s net cash obligation for this security?

• A. Clearing; pay £37,550 net.
• B. Matching; pay £75,200 gross.
• C. Trade capture; pay £37,550 net.
• D. Settlement; receive £37,650 gross.

Best answer: A

What this tests: Securities: Clearing and Settlement

Explanation: Execution is the agreement of the trade in the market. Trade capture records the trade details in the relevant systems. Matching checks that the two sides agree on key economic and settlement terms. Clearing establishes the obligations of each party and may net purchases and sales before settlement. Settlement is the final exchange of securities and cash, usually on a delivery-versus-payment basis. Registration and custody concern the legal record and safekeeping of the holding after settlement. Here, the agreed trades are being offset before DVP settlement, so the process is clearing. The broker bought £75,200 of stock and sold £37,650, leaving a net cash payment of £37,550.

• Trade capture records trade details; it does not describe the offsetting of obligations.
• Matching confirms agreed terms; £75,200 is the gross value of purchases, not the net obligation.
• Settlement is the final DVP exchange; £37,650 is only the gross sale proceeds, not the net cash movement.

Offsetting agreed obligations before DVP settlement is clearing, and total buys of £75,200 less sale proceeds of £37,650 leave £37,550 payable.

Question 7

Topic: Securities: Clearing and Settlement

A broker’s settlement team is preparing for settlement of a UK listed ordinary share sale.

Settlement facts:

• The trade was executed on-exchange and is due to settle today on a delivery-versus-payment basis in CREST.
• The broker’s nominee account is short 25,000 shares because an expected client transfer has not arrived.
• The buyer has matched the instruction and has cash available.
• The client says the missing shares should arrive tomorrow, but the broker must settle today if possible.

What is the single best next step?

• A. Cancel the matched settlement instruction and rebook the trade for tomorrow without further action.
• B. Use CLS to settle the equity delivery against the buyer’s sterling payment.
• C. Arrange a stock borrow for the missing shares so the sale can settle, then return equivalent shares when the client transfer arrives.
• D. Ask CREST to transfer registered title now and receive the cash when the shares arrive tomorrow.

Best answer: C

What this tests: Securities: Clearing and Settlement

Explanation: In securities settlement, a delivery-versus-payment transaction cannot complete unless both sides are available: the seller must be able to deliver securities and the buyer must be able to pay cash. If the seller is short stock on settlement date, the usual operational remedy is to source the missing securities, commonly through stock borrowing and lending, so the obligation can be met. The broker can then return equivalent securities when the expected holding arrives. Simply waiting creates a settlement fail and may expose the firm to operational, market, and reputational risk. Settlement systems do not normally transfer title without securities, and CLS is for foreign exchange settlement risk mitigation, not UK equity delivery in CREST.

• Rebooking the trade unilaterally does not meet the matched settlement obligation and would likely cause or prolong a fail.
• Transferring registered title without the securities is inconsistent with DVP settlement mechanics.
• CLS addresses FX payment settlement risk, not delivery of UK equities in CREST.

Borrowing the securities covers the delivery shortfall and allows DVP settlement to proceed on the intended settlement date.

Question 8

Topic: Securities: Clearing and Settlement

An operations analyst reviews a client query about shares held through a nominee account.

What is the best supported interpretation or action?

• A. Treat it as an ownership-record discrepancy and reconcile the nominee custody records for the holding.
• B. Take no further action because the cash debit proves the client owns the shares.
• C. Wait until the market price returns to 485p before correcting the statement.
• D. Amend the contract note to 492p because that is the current market price.

Best answer: A

What this tests: Securities: Clearing and Settlement

Explanation: A contract note records the trade terms, including the execution price, while custody and nominee records evidence the holding after settlement. In a nominee arrangement, the nominee is usually the registered holder, and the client’s beneficial entitlement is reflected in the custodian’s books and client statement. Here, the issue is not that ABC plc has a different current market price from the trade price. The key inconsistency is that cash has been debited and a purchase was contracted, but the post-settlement nominee statement shows no holding. That points to a safekeeping, settlement allocation, or custody reconciliation matter. The correct action is to investigate the ownership records supporting the client’s holding.

• Changing the contract note to the current market price confuses valuation with the original execution price.
• Relying only on the cash debit is incomplete; payment does not by itself confirm that the nominee records show the holding.
• Waiting for a price movement is irrelevant because ownership evidence should be reconciled regardless of market price.

The missing nominee holding after settlement is about evidence of the client’s beneficial entitlement, not the market quote.

Question 9

Topic: Securities: Clearing and Settlement

A UK equity fund has lent 400,000 listed shares through its custodian’s securities-lending programme to a prime broker.

Loan terms and current issue:

• The loan is open-term under a standard stock-lending agreement.
• The collateral schedule permits only cash or UK gilts, with a minimum collateral value of 105% of the lent shares, marked to market daily.
• The borrower pays a stock-lending fee of 50 bps per annum to the fund via the lending agent.
• The issuer has announced an EGM with a voting record date in five business days, and the fund manager wants to vote.
• The borrower asks to replace the gilt collateral with investment-grade corporate bonds for two days.

Which interpretation is most appropriate?

• A. Allow the borrower to substitute any marked-to-market collateral, suspend the lending fee while collateral is held, and recall only if the borrower misses a margin call.
• B. Accept the corporate bonds because they are investment grade, keep the fee unchanged, and rely on the fund retaining beneficial voting rights without recalling the shares.
• C. Keep collateral within the agreed cash-or-gilts schedule at 105%, accrue the borrower-paid lending fee, recall the shares in time to vote, and reject corporate-bond collateral unless the agreement is amended.
• D. Treat the 105% collateral as the purchase price for the shares, stop daily margining, and require the borrower to return the identical shares before any fee is payable.

Best answer: C

What this tests: Securities: Clearing and Settlement

Explanation: In securities lending, the borrower receives title to the securities and provides collateral to protect the lender. The collateral must meet the eligibility rules and margin requirements in the lending agreement, and it is normally revalued daily. Where non-cash collateral is used, the borrower commonly pays a lending fee to the lender. Voting rights follow legal title, so a lender that wants to vote at an EGM must recall the loan and receive equivalent securities before the relevant record date. A borrower cannot unilaterally replace agreed collateral with a different asset class merely because it is high quality; substitution must be permitted by the agreement and must preserve the required collateral cover.

• Investment-grade corporate bonds are not automatically eligible when the collateral schedule allows only cash or UK gilts.
• Economic exposure to lent securities does not preserve voting rights; recall is needed if the lender wants to vote.
• Collateral is not the purchase price, and securities lending requires return of equivalent securities under the contract, not necessarily the identical securities.

The stated collateral eligibility, fee arrangement, voting record date, and substitution request all point to maintaining agreed collateral, earning the lending fee, recalling to vote, and allowing substitution only by agreement.

Question 10

Topic: Securities: Clearing and Settlement

An operations analyst is reviewing an investor’s query about a UK listed shareholding held through the firm’s custody service.

Issue summary:

• The issuer’s register shows the shares in the name ABC Nominees Ltd.
• The client’s custody statement shows 2,000 shares allocated to her account.
• Other clients’ holdings in the same share are held under the same nominee name in one aggregate position.
• Dividends and voting instructions are processed by the custodian according to each client’s recorded entitlement.

Which interpretation is best supported?

• A. ABC Nominees Ltd is the beneficial owner because its name appears on the issuer’s register.
• B. Each client has a separate registered holding because the custodian records individual entitlements.
• C. The client has legal title because her custody statement identifies 2,000 shares allocated to her account.
• D. The client is the beneficial owner of 2,000 shares, while ABC Nominees Ltd is the registered legal holder in a pooled nominee arrangement.

Best answer: D

What this tests: Securities: Clearing and Settlement

Explanation: In a nominee structure, the name on the issuer’s register is the registered holder and usually has legal title to the securities. The underlying investor remains the beneficial owner, meaning the investor is entitled to the economic benefits, such as dividends, and can usually give voting instructions through the custodian’s process. A pooled nominee arrangement combines several clients’ securities in one aggregate registered position, with the custodian’s books showing each client’s entitlement. The client’s custody statement is evidence of her beneficial entitlement, not proof that her name appears on the issuer’s register.

• A custody statement showing an allocation supports beneficial ownership, not personal registration on the issuer’s register.
• The nominee’s registered status does not make it the beneficial owner when it holds for clients through custody arrangements.
• Internal client records do not create separate registered holdings where the issuer register shows one aggregate nominee position.

The issuer register identifies the nominee as legal holder, while the custodian’s internal records allocate beneficial entitlements within the pooled holding.

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