Free CISI CWM FM Practice Questions: Market Structure and Settlement

CISI means Chartered Institute for Securities & Investment. CWM means Chartered Wealth Manager, and this page is for the Financial Markets paper. Use this focused CISI CWM Financial Markets page as a short practice test for Market Structure 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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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: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

A UK broker has executed a sale of listed shares for a client. The trade is due to settle through CREST, but the client’s available holding in CREST is lower than the quantity sold.

Trade and settlement facts:

Which action and figure best reflects the role of stock lending and CREST in this situation?

• A. Borrow 61,500 shares for delivery through CREST and provide collateral of £309,960 to the stock lender.
• B. Ask CREST to create the 13,500 missing shares electronically and debit £64,800 from the buyer.
• C. Borrow 13,500 shares for delivery through CREST and provide collateral of £68,040 to the stock lender.
• D. Use stock lending to raise new share capital from the issuer and settle only the net cash difference in CREST.

Best answer: C

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: CREST is the UK’s electronic settlement system for eligible securities, supporting delivery versus payment rather than creating securities or acting as a source of finance. If a seller lacks enough stock to meet a settlement obligation, stock lending can be used to borrow securities temporarily so that delivery can still occur. Here, the broker has sold 75,000 shares but only 61,500 are available, leaving a shortfall of 13,500 shares. The collateral is based on the borrowed stock value: 13,500 × £4.80 = £64,800, and 105% of that value is £68,040. The borrower must later return equivalent securities to the lender, while CREST processes the settlement movements between members’ accounts.

• Borrowing 61,500 shares uses the available holding rather than the settlement shortfall, so the quantity and collateral are overstated.
• CREST records and settles securities transfers; it does not create missing shares for a seller.
• Stock lending is a temporary borrowing of existing securities, not an issue of new capital by the company.

The shortfall is 13,500 shares, and collateral is 13,500 × £4.80 × 105% = £68,040.

Question 2

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

A wealth manager’s dealing surveillance alert is reviewed after a UK-listed company releases a price-sensitive announcement.

Operational evidence:

• At 09:18, a portfolio manager was wall-crossed on confidential information about a contract win due to be announced at 10:30.
• At 09:42, the same portfolio manager entered a buy order for a discretionary portfolio.
• At 10:03, the order was executed on an MTF and the trade report was time-stamped.
• At 10:30, the company released the announcement and the share price rose shortly afterwards.
• The firm’s escalation procedure gives no fixed price-move or volume threshold for suspicious trading.

What is the single best action supported by these facts?

• A. Wait until settlement completes and the portfolio realises a profit before deciding whether the dealing is suspicious.
• B. Take no action unless the post-announcement price rise exceeds a specified percentage threshold.
• C. Treat the trade as outside market-abuse controls because it was executed on an MTF rather than the main exchange order book.
• D. Escalate the matter promptly to compliance for potential suspicious transaction reporting, using the wall-crossing, order, trade, and announcement records as evidence.

Best answer: D

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: Market-conduct decisions should be based on the applicable rule context and the available operational evidence. Here, the decisive facts are access to confidential price-sensitive information, the timing of the order before the public announcement, the execution record on a trading venue, and the subsequent announcement. The procedure does not provide a numerical trigger, so adding a made-up percentage or volume threshold would be inappropriate. The proper response is to escalate the case using the evidence trail so compliance can assess whether suspicious transaction reporting is required. Suspicion can arise before settlement or profit realisation, and execution on an MTF does not remove the trade from market-abuse scrutiny.

• A fixed percentage trigger is unsupported because no such threshold is stated in the facts.
• MTF execution is still trading-venue activity and does not avoid market-abuse analysis.
• Settlement completion or realised profit is not needed before suspicious timing and information access can justify escalation.

The timing and information-access evidence support escalation without needing to invent a price-move or volume threshold.

Question 3

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

A wealth manager buys 40,000 shares in a UK-listed company for a discretionary client. The trade is due to settle in CREST on a delivery-versus-payment basis.

Settlement facts:

• The client account had sufficient cash from trade date onward.
• The selling broker confirmed that the securities were available.
• The economics of the trade matched between the parties.
• The custodian changed its CREST participant details the previous week.
• The order management system still held the old standing settlement instruction.

What is the single best conclusion and control response?

• A. The likely cause is a cash shortfall; require the client to pre-fund all equity purchases before the order is released.
• B. The likely cause is an outdated settlement instruction; strengthen static-data controls, trade affirmation, and pre-settlement exception escalation.
• C. The likely cause is adverse price movement after trade date; amend the trade price before resubmitting settlement.
• D. The likely cause is seller default; replace CREST settlement with free-of-payment delivery to remove the cash leg.

Best answer: B

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: A common cause of failed settlement is incorrect or outdated standing settlement instructions, especially where custody or CREST participant details have changed. Here, the decisive facts rule out two common alternatives: the client had sufficient cash, and the seller had securities available. The trade economics also matched, so the problem is operational rather than commercial. A suitable control response is to maintain validated static data, confirm trade details promptly, match instructions before settlement date, and escalate unmatched or rejected instructions early. Delivery-versus-payment remains the appropriate risk-reducing settlement method because it links delivery of securities with payment.

• Pre-funding does not address the stated problem because the client account already had sufficient cash.
• Free-of-payment delivery would increase principal risk and is not a remedy for an SSI error.
• Post-trade price movement does not normally justify amending an already agreed trade price for settlement purposes.

The fail is best explained by incorrect CREST settlement details despite matched economics and available cash and stock.

Question 4

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

An investment firm holds Harbour plc ordinary shares for several discretionary portfolios through a nominee account at its CREST custodian. The share price is volatile after a financing announcement, and portfolio managers want to avoid accidental changes in cash exposure.

Custodian notice:

• Corporate action: 1-for-4 rights issue at £2.40 per new share
• Ex-rights date: 6 September
• Beneficial-owner entitlements: based on the custodian record-date position on 7 September
• Nil-paid rights: tradable until 20 September
• Custodian election deadline: 11:00 on 18 September
• Default for no valid instruction: nil-paid rights lapse, with no guaranteed value

Portfolio position:

• Portfolio X appears on the custodian entitlement report with 20,000 existing shares.
• The portfolio manager has not yet given an election.

Which action best reflects how the corporate action should be processed and why it matters to investors?

• A. Record 5,000 nil-paid rights, seek a take-up or sale election before 18 September, and warn that inaction may lose value and alter exposure.
• B. Subscribe automatically for 5,000 new shares, because a record-date holding creates an obligation to provide the subscription cash.
• C. Do nothing until the new shares are admitted, because the portfolio has no investor-level entitlement until the issuer allots shares.
• D. Book a cash dividend receivable, because the fall in the ex-rights share price is compensated by a guaranteed issuer cash payment.

Best answer: A

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: Corporate-action processing links the issuer’s event to the beneficial investors recorded through the nominee and custodian chain. For a rights issue, the firm must identify entitled holdings, calculate the entitlement, communicate the terms and deadlines, obtain a valid election, ensure cash is available if rights are taken up, instruct the custodian, and reconcile the resulting rights, shares, or cash. Here, 20,000 shares with a 1-for-4 entitlement creates 5,000 nil-paid rights. The event matters because rights can have market value, can be sold or taken up, and affect the portfolio’s equity exposure and potential dilution. Missing the custodian deadline may cause the rights to lapse under the stated default.

• Automatic subscription confuses an entitlement with an obligation; the portfolio needs a valid election and available cash before take-up.
• Waiting until new shares are admitted ignores the nil-paid trading and election period, where most investor value can be protected or lost.
• Treating the event as a cash dividend confuses a rights issue with an income distribution; the issuer has not guaranteed a cash payment.

A 1-for-4 entitlement on 20,000 shares gives 5,000 rights, and timely processing is needed to preserve economic value and control portfolio exposure.

Question 5

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

A surveillance analyst at a UK investment firm operating an MTF reviews activity in one share. The firm’s policy requires escalation for a suspicious transaction and order report when order activity gives reasonable suspicion of creating a false or misleading impression; proof of intent is not required.

Alert details:

The cancelled sell orders were 98% of the displayed sell orders, the displayed size was eight times normal depth, and the price move on the executed buys was worth £2,800 before costs.

Which market-integrity response is most appropriate?

• A. Immediately publish a market notice stating that the trader manipulated the share price.
• B. Escalate the alert to compliance for STOR handling, preserve the order and transaction evidence, and avoid alerting the trader under review.
• C. Take no action because most of the trader’s sell orders were cancelled rather than executed.
• D. Ask the trader for an explanation before escalating, because a STOR should only be considered after intent is proved.

Best answer: B

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: The figures indicate possible order-based market manipulation. The trader displayed sell orders equal to eight times normal depth, cancelled 98% of them almost immediately, and bought while those orders could have signalled artificial selling pressure. The later price rise created a £2,800 mark-to-market benefit on the buys: 40,000 shares × 7p = £2,800. Market-abuse controls are based on reasonable suspicion, not proof beyond doubt by the surveillance analyst. The appropriate response is to preserve the evidence and escalate through the firm’s compliance process for suspicious transaction and order report handling, while avoiding steps that could compromise the review.

• Treating cancellations as harmless ignores the unusually high cancellation ratio, abnormal displayed size, and trader benefit from the price move.
• Seeking proof of intent before escalation sets too high a threshold; reasonable suspicion is enough for STOR consideration.
• Publicly accusing a trader is not a proportionate surveillance response and could create legal and market-integrity problems.

The figures support reasonable suspicion of layering or spoofing, so escalation and evidence preservation are the appropriate market-integrity response.

Question 6

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

A wealth manager’s trading desk is reviewing execution of a large order in a FTSE 100 share after a profit warning widened the public spread.

Execution note:

• The share is admitted to trading on the London Stock Exchange, but the order was not executed on the lit order book.
• The order was routed to an FCA-authorised venue where many investment firms’ buy and sell interests can interact.
• Orders are hidden before execution under a large-in-scale waiver and match anonymously at a reference price.
• Matching follows the venue’s rulebook and is non-discretionary once compatible orders exist.
• The executing broker did not fill the order as principal from its own book.

Which is the single best description of the execution arrangement?

• A. A bilateral OTC transaction negotiated away from a trading venue
• B. A dark pool operated as a multilateral trading facility
• C. A systematic internaliser execution by the broker
• D. A regulated market execution on the share’s primary exchange

Best answer: B

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: The classification depends on how the order was executed, not merely where the share is admitted to trading. A dark pool is a non-displayed liquidity mechanism. Where multiple participants’ interests interact under a venue rulebook and matching is non-discretionary, the arrangement is consistent with an MTF-style multilateral venue. A systematic internaliser would be an investment firm dealing on its own account against client orders outside a trading venue. A bilateral OTC transaction would be privately negotiated off-venue between counterparties. A regulated market execution on the primary exchange is also ruled out because the order was routed away from the lit exchange order book. An OTF would involve operator discretion and is not the normal classification for this non-discretionary equity matching arrangement.

• Treating the trade as broker internalisation ignores that the broker did not act as principal and multiple participants’ interests interacted.
• Calling it bilateral OTC ignores the authorised venue, rulebook, and multilateral matching process.
• The share’s admission to the London Stock Exchange does not mean every execution in that share occurs on the regulated market.

Hidden, anonymous, non-discretionary matching of multiple third-party interests is consistent with a dark pool operated as an MTF.

Question 7

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

A wealth management firm executes a purchase of UK-listed shares for a discretionary client through a trading venue. The operations team records the following facts:

• The client transferred £50,000 to the firm before trade date to fund the purchase.
• The cash is held pending settlement and has not yet been paid to the seller.
• On settlement, the shares will be credited in CREST to the firm’s nominee company for the client’s beneficial account.
• A separate client sale has failed because that client has not delivered enough stock.
• An operations analyst suggests using the newly settled shares temporarily to cover the other client’s failed delivery and replacing them the next day.

What is the single best client-asset and client-money assessment?

• A. The cash is client money only after settlement fails, and the shares are client assets only after they are registered directly in the client’s own name.
• B. The cash and shares become the firm’s assets once the order is accepted, so the firm may use them for settlement management if it records an internal receivable to the client.
• C. The shares may be used because they are registered in the nominee’s name, provided the firm intends to replace them before the client requests a sale or transfer.
• D. The pre-settlement cash should be treated as client money, and the settled shares should be treated as custody assets that cannot be used to meet another client’s settlement obligation without proper authority.

Best answer: D

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: Client money and custody-asset protection focuses on beneficial ownership and segregation, not merely whose name appears on a register. Cash received from a client to fund a purchase and held pending settlement is client money and should be safeguarded accordingly. Once the securities settle into a nominee account for that client, they are custody assets held for the client’s benefit. The nominee structure does not give the firm freedom to use those securities for its own purposes or to solve another client’s failed settlement. Using one client’s securities to cover another client’s delivery shortfall would create an unauthorised client-asset use and a significant custody breach unless a valid arrangement specifically authorised that use, such as properly documented stock lending or collateral terms.

• Treating client cash and shares as firm assets ignores the segregation and beneficial ownership principles that underpin client-asset protection.
• Relying on nominee registration confuses legal registration mechanics with the client’s beneficial entitlement to the securities.
• Waiting until a settlement failure or direct client registration would understate when client money and custody protections arise.

Client cash awaiting settlement and nominee-held securities must be protected for the relevant client and cannot be diverted to cover another client’s failed delivery.

Question 8

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

A UK custodian is preparing for a period of heavy trading around an index rebalance. One institutional client owns a large line of a UK listed equity in uncertificated form. A market maker has asked to borrow part of that line for a few days.

Operations note:

• The borrower will provide collateral and pay a stock-lending fee.
• The lender wants economic compensation for any dividend while the shares are out on loan.
• Transfers and returns of the UK equity will be processed electronically through CREST.

Which statement best describes the market-operation role of the arrangement?

• A. Stock lending removes the need for collateral because CREST acts as central counterparty to the borrower and lender.
• B. Stock lending permanently transfers the lender’s investment exposure to the borrower, while CREST determines the market price of the shares.
• C. Stock lending provides temporary securities to support trading and settlement, while CREST records and settles the electronic transfer and return of the UK securities.
• D. Stock lending is a new issue of shares by the company, while CREST collects the subscription proceeds for the issuer.

Best answer: C

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: Stock lending is a secondary-market mechanism under which securities are lent, usually against collateral, for a fee. It can help market makers and other participants deliver securities, cover short positions, and support orderly settlement. The lender normally expects equivalent securities to be returned and may receive manufactured payments if income arises during the loan period. CREST is central to UK market operations because it provides electronic settlement for eligible UK securities, including the movement of securities between accounts. It is not an issuer fund-raising mechanism, a price-setting venue, or automatically a central counterparty guaranteeing stock-loan credit risk.

• Treating the arrangement as a new issue confuses secondary-market stock lending with primary-market capital raising.
• Assuming no collateral is needed overstates CREST’s role; stock loans are normally collateralised and CREST is a settlement system, not automatically the credit-risk guarantor.
• Describing a permanent transfer of investment exposure ignores the obligation to return equivalent securities and the lender’s continuing economic interest.

Stock lending can improve liquidity and settlement efficiency, and CREST is the UK electronic system used to settle transfers of eligible securities.

Question 9

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

An execution committee is classifying a new fixed-income execution channel under UK/EU-style market-structure terminology.

Channel extract:

• Asset class: sterling investment-grade corporate bonds.
• Clients request quotes from Delta Bank’s bond desk through an electronic interface.
• Delta Bank quotes from, and trades against, its own inventory as principal.
• Third-party client orders do not interact with each other, and there is no central order book.
• The activity is organised, frequent, systematic, and substantial.
• The channel operates outside a regulated market, MTF, or OTF.

Which market-structure classification is most accurate?

• A. Organised trading facility
• B. Systematic internaliser
• C. Dark pool within an MTF
• D. Ordinary OTC bilateral dealing with no systematic internaliser classification

Best answer: B

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: The decisive facts are principal dealing, bilateral execution, no interaction between third-party orders, and activity that is organised, frequent, systematic, and substantial. A systematic internaliser is an investment firm that deals on own account by executing client orders outside a regulated market, MTF, or OTF on that basis. Regulated markets, MTFs, and OTFs are multilateral systems, meaning they bring together third-party buying and selling interests. An OTF can be relevant for bonds, but it remains a multilateral system with operator discretion. A dark pool is associated with undisplayed order interaction and reduced pre-trade transparency; it is not simply any electronic interface without a lit order book.

• Ordinary OTC bilateral dealing captures the bilateral nature, but it ignores the stated organised, frequent, systematic, and substantial own-account execution.
• An OTF may trade bonds, but it requires multilateral interaction rather than a bank trading solely as principal with clients.
• A dark pool is not just a non-lit quote interface; it involves undisplayed order interaction, often within a venue structure such as an MTF.

Delta Bank is executing client orders against its own account outside multilateral trading venues on an organised, frequent, systematic, and substantial basis.

Question 10

Topic: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

A UK-listed company is the target of a possible offer. The compliance team is reviewing whether a proposed purchase would cross the internal trigger for seeking a ruling.

Voting shares: 120,000,000 in issue, with no treasury shares.

The firm’s guidance says a person reaching 30% or more of voting rights may trigger mandatory offer issues under the UK Takeover Code.

After the proposed purchase, which market body is responsible for administering and giving rulings on the relevant Takeover Code implications?

• A. The Panel on Takeovers and Mergers (POTAM), because the bidder would hold 30.25% and the issue concerns the UK Takeover Code.
• B. The FCA, because it operates the UK trading venue and decides whether the market purchase can settle.
• C. ESMA, because it gives binding rulings on UK public takeover offers once a 30% voting-rights level is reached.
• D. The London Stock Exchange, because it administers the UK Takeover Code for companies admitted to its markets.

Best answer: A

What this tests: UK and International Market Structure, Trading Venues, Custody, Settlement, and Market Regulation

Explanation: The post-purchase holding is 34,200,000 + 2,100,000 = 36,300,000 shares. Dividing by 120,000,000 voting shares gives 30.25%, so the supplied 30% trigger is crossed. In a UK public takeover context, the Panel on Takeovers and Mergers, referred to here as POTAM, administers the Takeover Code and gives rulings on Code issues such as mandatory bid implications. The FCA is a key UK financial regulator, including in market abuse and admissions/prospectus contexts, but it is not the Takeover Code panel. The LSE operates markets and sets exchange rules for issuers and member firms. ESMA is an EU securities markets authority and does not give binding rulings for UK Takeover Code matters.

• FCA supervision is relevant to wider UK financial regulation, but the facts point to the Takeover Code rather than market abuse or admissions regulation.
• The LSE provides trading venues and exchange rules, but it does not administer the UK Takeover Code.
• ESMA has an EU market-regulation role, but the scenario is a UK Takeover Code matter.

The bidder’s post-purchase holding is 36,300,000 out of 120,000,000 shares, or 30.25%, so Takeover Code administration falls to POTAM.

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