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Securities & Cash Settlement
Buy-ins and penalties
Learning Outcome
5
Understand how buy-ins and penalties ensure fair settlement.
4
Identify settlement penalties.
3
Explain the auction mechanism.
2
Understand the buy-in process.
1
Explain the purpose of buy-ins.
Buy-in
A buy-in is the process by which the Clearing Corporation purchases securities from the open market, on behalf of a seller who has failed to deliver them, so that the buyer still receives the securities they were originally owed.
Buy-in Process:
1.Shortfall confirmed —
The Clearing Corporation confirms the seller has not delivered the full quantity of securities owed on settlement day.
3.Seller notified —
The defaulting seller is informed that a buy-in has been initiated against their shortfall.
2.Buy-in marked —
The shortfall quantity is marked for a buy-in, meaning the Clearing Corporation will arrange to source those securities from elsewhere.
5. Delivered to the buyer —
The purchased securities are delivered to the buyer, usually within a day or two of the original settlement date.
4.Securities purchased —
The missing securities are purchased through an auction, so the buyer still gets what was promised.
The defaulting seller bears the extra cost if the auction price is higher than the original trade price, plus any additional penalty — so the buyer is protected and does not lose out because of the seller's failure to deliver.
Buy-in process
Auction Mechanism
Settlement Penalties
Beyond simply covering the shortfall, a defaulting party is usually also charged a penalty, both to compensate the other side and to discourage failures in the first place:
Summary
5
Buy-ins promote timely and secure settlement.
4
Defaulters pay extra costs and penalties.
3
Unavailable securities are closed out in cash.
2
Missing securities are bought through auction.
1
Buy-ins ensure securities are delivered.
Quiz
Who arranges the buy-in process?
A. Stock Exchange
B. Depository
C. Clearing Corporation
D. Custodian
Quiz-Answer
Who arranges the buy-in process?
A. Stock Exchange
B. Depository
C. Clearing Corporation
D. Custodian
Fund Portfolio Reconciliation &NAV Validation - Buy-ins and penalties
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