The Continuous Net Settlement (CNS) System is NSCC’s core netting, allotting and fail-control engine. Within CNS, each security is netted to one position per Member, with NSCC as its central counter-party (novation).
Within CNS, NSCC acts as the central counterparty for clearance and settlement for virtually all broker-to-broker equity, corporate and municipal bond and unit investment trust trading in the United States. CNS settles trades from the nation's major exchanges, markets and other sources and nets these transactions to one security position per Member per day. Typically, NSCC’s trade guarantee will attach to CNS transactions that reach point of validation.
CNS processes include an automated book-entry accounting system that centralizes settlement and maintains an orderly flow of security and money balances.
Throughout the CNS processing cycle the system generates reports that provide Members with a complete record of security and money positions and related information.
While NSCC provides final settlement instructions to its Members each day, the payment and movement of securities ownership occurs at DTCC's subsidiary, The Depository Trust Company (DTC). As DTCC's depository, DTC also eliminates the movement of securities by providing book-entry deliveries, which transfer the ownership of securities electronically.
Who Can Use the Service
All NSCC full-service Members
CNS offers users the following efficiencies and risk protections:
- Regardless of volume, CNS nets Members’ security obligations on a daily basis to one net long and short position in each issue, minimizing security movements and associated costs.
- Through CNS, NSCC becomes the contra-party to each trade and guarantees each transaction under NSCC’s Rules.
- Closing fail positions are marked-to-market daily and re-netted with new transactions, which reduces risk.
- While CNS deliveries are made automatically using Members’ depository positions, Members can exempt certain short positions to avoid segregation violations and effectively meet other delivery needs.
- CNS minimizes the need to deliver securities on a trade-by-trade basis to Members’ contra parties.
- Cash dividends, stock dividends, bond interest, and mandatory corporate actions are automatically debited or credited to Members' CNS accounts with open fail positions.
How the Service Works
On settlement date, all trades due to settle are netted by issue to a net long (buy) or a net short (sell) position, and then are further netted with any new miscellaneous activities, including ID Net transactions, and open positions from the previous day.
The CNS automatic delivery process occurs in two cycles: the “night cycle,” which begins the night before settlement, and the “day cycle” on settlement day.
CNS short positions, which represent securities owed by Members to NSCC, are compared against their DTC accounts to determine availability. If shares are available, they are delivered from the Member's account at DTC to NSCC's account at DTC to cover Members' short obligations to CNS. Members can use CNS exemptions to control the automatic delivery of securities from their DTC accounts (partial settlements are permissible).
CNS long positions, which represent securities NSCC owes Members, are processed in an order determined by an algorithm. Securities are automatically allocated to users' long positions as they are received by NSCC. Members can request priority for some or all issues on a standing or override basis. Buy-in submission notices also will affect the priority of a Member's long position.
Daily money settlement is based on the value of all settled trades plus or minus mark-to-the-market calculations for all open CNS positions.
CNS System provides the following three ancillary services:
- The Fully-Paid-for-Account provides Members with a "good control location", as required by the Customer Protection Rule (Section 15c3-3 of the Exchange Act) for Members' fully-paid-for customer securities in the event of a deficit that results from deliveries made outside CNS in anticipation of CNS receives.
- Reorganization sub-accounts allow Members to take part in voluntary tender and exchange offers in an automated environment.
- Members may issue buy-in intents to CNS once a security has failed. After CNS receives a buy-in, the issuing Member will be placed on high priority to receive the securities. Members who owe shares to CNS will be passed liability for the shares of the buy-in.
For More Information
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