EX-CLEARING

There are two ways to clear a security. You either clear it manually through a firm's Purchase and Sale group or you clear it electronically via a clearing house. When you have a DTC-Eligible stock, you will confirm the trade through the DTC clearing House. If you have a non DTC-Eligible stock, you have to make sure the trade has been confirmed by both brokers (the executing and the contrabroker) by hand. So, all Ex-Clearing means is that you have to do it manually instead of through a clearing house.

Just so you understand, this is a pain in the ass to do. There is a process even though all Ex-Clearing really is is just a means of trade comparison (settlement) when the traded security does not meet the eligibility standards of the designated clearing corp. What happens is that the executing broker's P&S Department sends a standard comparison form to the P&S Department of the contra broker. Both firms basically compare the following information by hand to make sure it all checks out: Trade Date, Settlement Date, Security Traded, Quantity Traded, Transaction Price, Accrued Interest (Fixed Income Only) and Net or Settlement Dollar Amount.

If the contra broker agrees with the specific trade details on the Comp, the Comp is signed and returned to the originating brokerage firm. IF they don't, both sides figure out what they don't agree with.

When the trade settles, the broker’s Settlement area will create a Fail Record (basically, did the trade settle) on the firm’s accounting books and records to represent the open receivable (incoming funds for a sale or incoming securities for a buy) or deliverable (outgoing securities for a sale or outgoing funds for a buy). There are two types of fails, Fail to Receive or Fail to Deliver, which corresponds to what action the broker is taking on a trade. This makes manual settlement The Settlements department will ‘set-up’ a Fail-to-Deliver for securities sold to another firm, and a Fail-to-Receive for securities purchased from another firm. The two sides send what they need to send to each other (the buying firm pays the selling firm for the delivered securities) and the open Fail Record turns into a closed Fail Record and is cleaned up and removed from the books since the trade settled without a hitch.

If, at settlement, the contrabroker doesn't agree with the trade details, they will "DK" or "Don't Know" the trade and say that the contrafirm doesn't recognize the trade as being valid. When this happens, you have to go back to the settlements group and figure out what the issue is. As long as a trade is open and unsettled, that Fail Record remains open which is a problem because it violates a few rules and regulations that, depending on the size of the trade, can cost lots of money.

So, in clearing an Ex-Clearing Non-DTC Eligible Security, you have to do all that by hand. It's a real pain in the ass because if something is wrong on a Non-DTC Eligible Security (be it something as extremely particular as just being 1 digit off on the Cusip or something as simple as just not getting the net price right), it takes much longer to figure out the trade issue.