Free CISI IAD Securities Practice Questions: Trading, Settlement, Custody, and Post-Trade

CISI means Chartered Institute for Securities & Investment. IAD means Investment Advice Diploma, and this page is for the Securities unit. Use this focused CISI IAD Securities page as a short practice test for Trading, Settlement, Custody, and Post-Trade. 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 Trading, Settlement, Custody, and Post-Trade Operations

A UK broker routes client orders in large-cap shares to an electronic order book where buy and sell orders are matched anonymously. The venue’s rules provide that matched trades are cleared through a central counterparty before settlement in CREST. A trainee asks why firms can trade without assessing the credit standing of each matched firm before settlement. Which feature best explains this market process?

• A. The venue’s market maker guarantees that all matched trades will be executed at the same price.
• B. The central counterparty is interposed between the trading firms, becoming buyer to every seller and seller to every buyer.
• C. The order book displays bid and offer prices so that investors can compare execution quality.
• D. The settlement system records the final transfer of shares and cash between nominee accounts.

Best answer: B

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: A central counterparty supports anonymous trading by standing between the two original trading firms after a trade is matched. This process is commonly described as becoming the buyer to every seller and the seller to every buyer. The result is that each clearing member faces the CCP rather than the unknown firm on the other side of the trade. The CCP manages this exposure through clearing membership standards, margin, default procedures and related risk controls. This does not remove market risk or guarantee investment performance, but it improves market integrity and settlement discipline by reducing bilateral counterparty risk in centrally cleared trading.

• Settlement in CREST is about completing the transfer of securities and cash; it does not itself explain anonymous counterparty credit substitution.
• Price transparency on an order book helps execution and market monitoring, but it does not replace the counterparty between the firms.
• Market makers may provide liquidity in some market models, but they do not guarantee that all matched trades occur at one common price.

Interposition by the central counterparty replaces bilateral counterparty exposure with exposure to the clearing house, supported by its risk controls.

Question 2

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A UK investment firm must buy a moderate-size holding of a highly liquid FTSE 100 ordinary share for a retail advisory client. The client wants a transparent execution price and the firm wants to minimise bilateral counterparty and settlement risk. The order does not require bespoke terms. The available exchange order book displays executable prices and trades are novated to a central counterparty. Bilateral OTC trades would be privately negotiated and would almost invariably settle without a clearing house or central-counterparty mechanism.

Which trading approach best fits these priorities?

• A. Use the exchange order book with central counterparty clearing and standard settlement.
• B. Arrange a private matched bargain with another client account and settle directly.
• C. Use a bespoke OTC contract so settlement terms can be customised.
• D. Negotiate a bilateral OTC purchase with one market maker to avoid displaying the order.

Best answer: A

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: Trading mechanism choice should match the instrument and the execution priorities. For a liquid listed equity, an exchange order book supports transparency because executable prices are visible and trades occur under standard market processes. Central counterparty clearing reduces bilateral counterparty risk by interposing the CCP between buyer and seller, while standard settlement helps operational certainty. OTC negotiation can be useful for illiquid securities, large blocks, or bespoke terms, but it generally offers less pre-trade transparency and, in the stated facts, would settle without CCP protection. Because the order is moderate in size, liquid, and does not need customised terms, the exchange route best aligns with liquidity, transparency, counterparty-risk reduction, and settlement discipline.

• Avoiding order display may help some large or sensitive trades, but it sacrifices the stated transparency priority and leaves bilateral settlement exposure.
• A private matched bargain may be possible operationally, but direct settlement does not meet the aim of reducing counterparty and settlement risk.
• Bespoke OTC terms are unnecessary where the client wants a standard purchase of a liquid listed share.

A liquid listed share with a need for price transparency and reduced counterparty exposure is best suited to exchange trading with CCP clearing.

Question 3

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A dealer executes two client transactions on Monday. There are no public holidays in the settlement period, and both trades are in sterling.

• The client sells a UK gilt in the secondary market. The firm’s settlement guide states that gilts normally settle on T+1.
• The client buys UK exchange-traded ordinary shares through CREST. The guide states that these shares normally settle on T+2.

Which statement best describes the standard settlement timing?

• A. Both trades should settle on Tuesday because both are UK securities.
• B. The gilt sale should settle on Tuesday, and the ordinary share purchase should settle on Wednesday.
• C. The ordinary share purchase should settle on Tuesday, and the gilt sale should settle on Wednesday.
• D. Both trades should settle on Wednesday because CREST applies the same standard cycle to gilts and equities.

Best answer: B

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: Settlement timing is counted from the trade date, excluding non-business days. Here, the trade date is Monday and there are no holidays. A T+1 gilt transaction is due to settle one business day after trade date, so Tuesday. A T+2 UK ordinary share transaction is due to settle two business days after trade date, so Wednesday. The key point is that different securities can have different standard cycles even where both are UK instruments and both are sterling transactions.

• Treating both trades as Tuesday ignores the T+2 cycle given for ordinary shares.
• Treating both trades as Wednesday ignores the T+1 cycle given for gilts.
• Reversing the dates applies the equity cycle to the gilt and the gilt cycle to the equity trade.

With T+1 for the gilt and T+2 for the CREST-settled ordinary shares, Monday’s trades settle on Tuesday and Wednesday respectively.

Question 4

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A broker is short of a listed share and needs stock to settle a client sale today. It arranges to borrow 80,000 shares from an institutional lender.

• Current share price: 375p
• Required collateral margin: 102% of the market value of the borrowed shares
• The collateral agreement allows the collateral taker to reuse the collateral during the loan period

Which interpretation is correct?

• A. The institutional lender is borrowing securities, must provide £306,000 collateral, and the permitted reuse is settlement netting.
• B. The broker is borrowing securities, must provide £306,000 collateral, and the permitted reuse is rehypothecation.
• C. The broker is lending securities, receives £300,000 collateral, and the permitted reuse is a repo haircut.
• D. The broker is entering a reverse repo, must provide £294,000 collateral, and the permitted reuse is margining.

Best answer: B

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: In a stock lending arrangement, the party needing stock is the securities borrower and normally provides collateral to the securities lender. The collateral is often set above the market value of the borrowed securities to provide a margin against price movements. Here, 80,000 shares at 375p are worth £300,000. Applying a 102% collateral margin gives £306,000. If the collateral taker is allowed to reuse the collateral, that reuse is commonly described as rehypothecation. A repo or reverse repo is instead a securities financing transaction framed as a sale and later repurchase of securities, typically used to borrow or lend cash against securities collateral.

• A reverse repo describes the cash lender’s side of a sale-and-repurchase transaction, not borrowing shares to settle a short position.
• The institutional lender lends the stock and receives collateral; it is not the securities borrower in these facts.
• A repo haircut or margin affects collateral value, but the permitted reuse of collateral is rehypothecation.

The borrowed shares have a market value of £300,000, so 102% collateral is £306,000, and permitted reuse of collateral is rehypothecation.

Question 5

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A UK gilt dealer wants to raise overnight liquidity while maintaining economic exposure to a gilt position. It transfers gilts with a market value of £10 million to a bank today, receives £9.8 million in cash, and agrees to buy back equivalent gilts tomorrow for £9,802,000. The agreement permits the bank to use the gilts in its own collateral arrangements during the term.

Which statement best applies the securities financing concepts in this arrangement?

• A. The dealer has entered a reverse repo, the bank has entered a repo, and the £200,000 difference represents accrued coupon on the gilts.
• B. The dealer has made an outright sale, the buyback term is only an option, and the bank may not use the gilts while the agreement is open.
• C. The dealer has entered a repo, the bank has entered a reverse repo, the £200,000 difference is a margin or haircut, and the bank’s permitted reuse is collateral re-use or rehypothecation.
• D. The dealer has entered a stock loan, the cash received is securities-lending fee income, and margin is relevant only if settlement fails.

Best answer: C

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: In a repo, one party sells securities and agrees to repurchase equivalent securities at a later date. For the cash-raising dealer, this is a repo. For the bank providing cash and receiving the gilts, it is a reverse repo. Economically, the securities act as collateral for the cash, even though legal form may involve title transfer. Because the gilts are worth £10 million and the cash advanced is £9.8 million, the bank has a £200,000 cushion, commonly described as margin or a haircut. The difference between the sale and repurchase price reflects the repo financing cost. If the agreement permits the bank to use the gilts during the term, that is collateral re-use, commonly linked with rehypothecation concepts.

• Reversing repo and reverse repo confuses the cash raiser with the cash provider.
• A stock loan normally focuses on borrowing securities and returning equivalent securities, not raising cash through a sale-and-repurchase structure.
• An outright sale does not fit because the dealer has a firm agreement to repurchase equivalent gilts.

The dealer is selling securities with an agreement to repurchase them, while the cash provider is on the reverse side and is over-collateralised by the haircut.

Question 6

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A UK equity fund lends £8 million of FTSE 100 shares to an approved broker for 21 days under a stock-lending agreement. The broker must provide cash collateral equal to 105% of the market value, with daily margin calls. The fund will receive a stock-lending fee of 0.30% per annum and must pay interest to the broker on the cash collateral at SONIA less 0.10%. If the broker defaults, the fund may use the collateral to buy replacement shares.

Which statement is the single best interpretation of the transaction?

• A. The fund earns the stock-lending fee, owes the agreed collateral interest, and still has counterparty risk if the broker defaults and the collateral is insufficient or difficult to use.
• B. Daily margin calls mean the transaction has no counterparty-risk exposure unless the shares themselves become illiquid.
• C. The broker earns the stock-lending fee because it provides the cash collateral, while the fund has only market risk in the FTSE 100 shares.
• D. The fund earns both the stock-lending fee and all interest on the cash collateral, while the 105% collateral removes counterparty risk.

Best answer: A

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: In a stock-lending transaction, the lender transfers securities temporarily and expects equivalent securities to be returned. The lender is compensated by a lending fee, but cash collateral may carry an interest obligation back to the borrower at the agreed rebate or collateral rate. Collateralisation and daily margining are important risk controls because they reduce the lender’s exposure if the borrower fails to return the securities. They do not eliminate risk entirely. If the borrower defaults, the lender may need to realise or use the collateral to replace the securities, and the collateral value, timing, liquidity, and market movements can still create a shortfall or operational loss.

• Treating all collateral interest as the fund’s income ignores the agreed obligation to pay SONIA less 0.10% to the broker.
• Treating the broker as earning the lending fee reverses the economics of the stock loan; the borrower pays the lender for use of the securities.
• Treating daily margining as a complete risk transfer overstates the protection provided by collateral and ignores default and replacement risk.

The fee and collateral-interest flows are separate, and collateral mitigates but does not remove replacement and counterparty risk.

Question 7

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A retail client buys 2,000 ordinary shares in a UK-listed company through an investment firm. The shares settle into the firm’s nominee account in CREST rather than into a certificated holding. The issuer’s share register shows the nominee company as holder, while dividends are credited by the firm to the client’s account. The client asks who owns the shares. Which statement is the single best answer?

• A. The issuer owns the shares because the company register is the only record that determines economic entitlement.
• B. The client is the registered legal holder because the contract note confirms that the client paid for the shares.
• C. The nominee becomes the beneficial owner until the client asks for the shares to be transferred into certificated form.
• D. The nominee is the registered legal holder, while the client is the beneficial owner entitled to the economic benefits of the shares.

Best answer: D

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: In a nominee custody arrangement, the issuer’s register normally records the nominee company as the shareholder of record. That gives the nominee registered legal title for administrative purposes, such as settlement, custody and communication through the market infrastructure. The underlying client remains the beneficial owner because the shares were bought for the client’s account. Beneficial ownership gives the client the economic interest, including dividends, sale proceeds and exposure to gains or losses. The custodian or investment firm administers the holding, credits income to the client, and processes corporate-action instructions according to its custody arrangements.

• Paying for the shares and receiving a contract note does not by itself put the client’s name on the issuer’s register.
• Holding through a nominee does not transfer the client’s economic ownership to the nominee for its own benefit.
• The issuer’s register identifies the registered holder, not who has the underlying economic entitlement in a nominee custody structure.

In a nominee arrangement, legal title appears in the nominee’s name but the underlying client retains beneficial ownership.

Question 8

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A UK fund lends 50,000 listed shares to a market maker under a stock-lending agreement. At inception, the shares are priced at £20.00 each and the borrower provides cash collateral equal to 102% of the shares’ value. No further margin call has yet been made.

Before the shares are returned, the borrower defaults. The shares now trade at £21.40. Assume the fund can use the cash collateral immediately and there are no transaction costs or income adjustments.

What is the fund’s immediate economic position if it must replace the shares in the market?

• A. It has a £20,000 collateral surplus.
• B. It faces a £70,000 shortfall equal to the share price rise only.
• C. It is fully protected because the collateral was above 100% at inception.
• D. It faces a £50,000 collateral shortfall.

Best answer: D

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: In stock lending, the lender is exposed if the borrower fails to return the securities and the collateral is not sufficient to buy them back. The original loan value was 50,000 × £20.00 = £1,000,000. Cash collateral at 102% was therefore £1,020,000. At default, replacing the securities costs 50,000 × £21.40 = £1,070,000. The fund can apply the collateral, but it still needs £50,000 more to restore the holding. Overcollateralisation at inception reduces risk but does not remove it if the borrowed securities rise in value and collateral is not topped up in time.

• A £20,000 surplus existed only at inception, before the share price rose.
• Initial overcollateralisation does not guarantee full protection if market movements create an undercollateralised position.
• The £70,000 share price rise is not the net shortfall because the fund also held £20,000 of excess collateral at the outset.

The replacement cost is £1,070,000 and the collateral held is £1,020,000, leaving a £50,000 shortfall.

Question 9

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A UK investment firm holds a listed UK ordinary share in a pooled nominee account through CREST. Client A sells shares to Client B for £12,000 cash. Both clients use the same nominee, and the nominee company remains the registered holder on the issuer’s register before and after the trade. No tax relief or exemption applies.

Which treatment best applies the transfer mechanics?

• A. A paper stock transfer form must be stamped before the registrar can record the transfer.
• B. The issuer’s register need not be altered, but SDRT should be accounted for because beneficial ownership changes for consideration.
• C. The issuer’s register must be altered from Client A to Client B, but SDRT is not due because the nominee remains unchanged.
• D. Neither register alteration nor tax collection is required because the registered holder is unchanged.

Best answer: B

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: In a nominee arrangement, the issuer’s register records the nominee as the legal holder, not each underlying client. If shares move between two clients within the same nominee, the issuer’s register does not need to change because the registered holder remains the same. However, the trade is still a purchase of UK chargeable securities for cash consideration. Where no exemption applies, SDRT is due even though the movement is recorded through nominee or CREST records rather than by changing the issuer’s register. Register mechanics and transfer tax are related but separate issues.

• Requiring the issuer’s register to show the individual clients confuses beneficial ownership with registered legal ownership.
• Ignoring SDRT because the nominee name is unchanged overlooks the taxable transfer of beneficial ownership for consideration.
• Requiring a stamped paper stock transfer form is inappropriate where the scenario is an internal nominee/CREST holding rather than a certificated paper transfer to the registrar.

The registered holder is unchanged, but a chargeable agreement for consideration still gives rise to SDRT.

Question 10

Topic: Securities Trading, Settlement, Custody, and Post-Trade Operations

A retail client currently holds UK ordinary shares in certificated form with her name on the issuer’s register. She is considering transferring the shares into an investment firm’s nominee custody account to simplify administration. She asks how this would affect proof of ownership, dividends, corporate actions, and reporting. Which response best applies the custody principle?

• A. The issuer would maintain a separate register entry for the client within the nominee account, so custody statements would no longer be needed as ownership evidence.
• B. The nominee would normally appear as the registered holder, while the client’s beneficial interest would be evidenced through the firm’s custody records and client statements; the firm would administer income and corporate action communications for her.
• C. The client would remain the registered holder, keep the share certificate, and receive all issuer communications directly, while the firm would only provide dealing services.
• D. The firm would become the beneficial owner of the shares and could decide how to use dividends and voting rights unless the client sells the holding.

Best answer: B

What this tests: Securities Trading, Settlement, Custody, and Post-Trade Operations

Explanation: A nominee custody arrangement separates legal registration from the client’s economic ownership. The nominee or custodian is usually shown on the issuer’s register or relevant settlement system records, not the underlying client. The client’s beneficial interest is therefore evidenced by the investment firm’s books, custody records, contract notes, and periodic statements. Administration also changes: dividends, interest, voting notices, takeovers, rights issues, and other corporate action information are received and processed through the custodian or nominee, then allocated or communicated to the client according to the custody agreement and applicable client asset procedures. This can simplify administration, but it means the client depends on accurate custody records and clear reporting rather than direct issuer registration.

• Direct registration and share certificates describe certificated holding, not nominee custody.
• Treating the firm as beneficial owner confuses custody with ownership; client assets should be administered for the client’s benefit.
• A separate issuer register entry for each underlying client is not the usual feature of pooled nominee custody; firm records and statements become important evidence.

In nominee custody, legal registration and day-to-day administration sit with the nominee or custodian, while the client relies on custody records and statements to evidence beneficial ownership and entitlements.

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