Financial markets: financial markets issues: settlement netting - an example
Party A operates a settlement netting service. Broker B has entered into an agreement with Party A whereby all Broker B’s 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 ‘XYZ Ltd’ shares at £1.00 per share to Broker B, Consideration Amount = £100
- Broker B sells 50 ‘XYZ Ltd’ shares at £1.10p per share to Party A, Consideration Amount = £55
- Broker B sells 25 ‘XYZ Ltd’ shares at £1.00p per share to Party A, Consideration Amount = £25
In the example each agreement to transfer ‘XYZ Ltd’ 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||–►||+100 Cr|
|+50 Cr||◄–||-50 Dr|
|+25 Cr||◄–||-25 Dr|
|- 2 5 D r||–►||+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 £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.