collateral to support a guarantee that is provided by the CCP to transacting

Collateral to support a guarantee that is provided by

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collateral to support a guarantee that is provided by the CCP to transacting parties in a trade Each exchange has its own clearinghouse and all members of the exchange are generally required to clear their trades through the clearinghouse
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Electronic Book Entry and Netting Securities are accounted for by “book-entry” in an electronic table and transfer of ownership of a security is based on the simultaneous transfer of funds to pay for the security, which is called “delivery versus payment” Once title to the security has been passed to the buyer, the clearing and settlement process ends and the custody process begins Bank CDs and commercial paper settle on the same business day (“for cash”); U.S. Treasury securities settle the next business day (“for regular”); FX settles two business days after the trade (“T + 2”) and U.S. equity securities settle three business days after the trade (“T + 3”) Since most settlements are completed between an investment bank and an exchange and since banks typically have many purchases and sales of the same security, the bank’s net delivery obligation is determined by the exchange, and a single payment is made either by the exchange to an investment bank or by the bank to the exchange at the end of each trading day
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Derivatives Clearing and Settlement Clearing and settlement of derivatives is quite different from that of securities Instead of clearing and settling within three days, derivatives often remain outstanding for a much longer period of time Unlike securities, where the security is delivered and simultaneously paid for in full, derivatives represent an obligation (if a futures or swap contract) or an option (if an options contract) to buy or sell a financial instrument or asset at a future date, which can be weeks, months or years in the future As a result, the buyer and seller pose large financial risks to an exchange for an extended period of time and so exchanges require daily mark-to-market posting and adjustment of collateral based on the changing value of the derivatives contract Derivatives therefore require substantially more complex risk management systems than are required for securities
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Investment Bank Fees Investment banks collect fees on all transactions that they clear and settle on behalf of investing and hedging clients (as counterparty to exchanges that also collect fees) In addition, banks act as custodians for securities owned by their clients This can be a significant source of revenue for banks: for example, in 2011, J.P. Morgan reported Worldwide Treasury and Securities Services revenue (including clearing and custody related revenue) of approximately $7.7 billion and net income of $1.2 billion
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