STSM126030 - Financial markets: financial markets issues: settlement netting - an example
Example
Party A operates a settlement netting service. Broker B has entered into an agreement with Party A whereby all Broker B鈥檚 gross share transactions undertaken with Party A in the same security on the same regulated market will be netted by Party A on a daily basis.
- Party A sells 100 鈥榅YZ Ltd鈥� shares at 拢1.00 per share to Broker B, Consideration Amount = 拢100
- Broker B sells 50 鈥榅YZ Ltd鈥� shares at 拢1.10p per share to Party A, Consideration Amount = 拢55
- Broker B sells 25 鈥榅YZ Ltd鈥� shares at 拢1.00p per share to Party A, Consideration Amount = 拢25
In the example each agreement to transfer 鈥榅YZ Ltd鈥� shares above will create a relevant credit or debit position on both counterparties stock book:-
| Party A: | Direction of | Broker B: | - |
|---|---|---|---|
| Stock Book | Stock Movement | Stock Book | - |
| -100 Dr | --鈻� | +100 Cr | - |
| +50 Cr | 鈼勨赌� | -50 Dr | - |
| +25 Cr | 鈼勨赌� | -25 Dr | - |
| ________ | - | ________ | - |
| - 2 5 D r | --鈻� | +25 Cr | (Net Position) |
By adding together the various gross credits and debits this results in a net sale by Party A of 25 shares and a net purchase of 25 shares by Broker B. Using the same method a net movement of 拢20 cash will also be transferred by Broker B to Party A. In this instance, Party A will arrange for a single net instruction to be input to CREST transferring 25 shares from Party A to Broker B for settlement.
Occasionally, as a result of performing settlement netting, the gross quantity of shares bought may equate with the gross quantity of shares sold. In this situation, as there is no net movement of shares requiring settlement, no instruction is input to CREST.