Depository Eligible

A firm wants a particular security to be eligible for book-entry movement through the depository system, since customer demand for that security has grown. Can the firm simply designate the security as depository eligible on its own?

1. A.Yes -- any broker-dealer may unilaterally designate a security as depository eligible whenever customer demand for it justifies the added convenience.Wrong. A broker-dealer cannot unilaterally designate a security as depository eligible; the depository itself makes this determination.
2. B.No -- depository eligibility is determined by the depository itself, based on its own criteria and typically the issuer's own qualification or agreement, not by an individual broker-dealer's own preference or customer demand for a particular security.Correct. Depository eligibility is determined by the depository itself, based on its own criteria and the issuer's qualification.
3. C.Yes, but only if the firm first obtains written consent from every other broker-dealer that also holds positions in the same security.Wrong. Consent from other broker-dealers is not the mechanism by which depository eligibility is determined.
4. D.No, because depository eligibility is determined exclusively by a vote of the security's existing registered holders, held annually.Wrong. Depository eligibility is not determined by an annual vote of registered holders; the depository itself makes the determination.

Why: Depository eligibility is a determination the depository itself makes, generally based on its own criteria and the issuer's own qualification or agreement to have its security handled that way -- it is not something an individual broker-dealer can simply confer on a security by its own decision, no matter how much customer demand exists for the convenience of book-entry movement.

Ardenmoor Securities is deciding whether a security can settle through the clearing agency continuous net settlement system or must instead be settled directly between the two firms. What is the threshold condition for processing through that system?

1. A.The security must be eligible for book-entry transfer at the depository and capable of being processed by the system.Correct. Netting is a book-entry operation, so depository eligibility is the precondition for everything else.
2. B.The security must be listed on a national securities exchange.Wrong. Listing status governs where a security trades, not how a position in it can be moved at settlement.
3. C.Both firms must belong to the same self-regulatory organization.Wrong. The membership that matters is participation at the clearing agency, and it need not run through any common SRO.
4. D.The issuer must have appointed the depository as its transfer agent.Wrong. The depository holds positions on the books of the transfer agent; it does not replace the agent.

Why: Continuous net settlement is a book-entry system layered on a securities depository. A position can only be moved by netting entries if the security itself can move by book entry at the depository, so depository eligibility, plus the ability of the system to process the security, is the gate. Securities that fail that gate have to be settled between the two firms directly, which is the operational work the system was built to remove. Exchange listing, shared membership in a self-regulatory organization and the identity of the transfer agent have nothing to do with it.

A customer of Norhaven Clearing deposits a certificate in an issue that is not depository eligible. What follows for the operations department?

1. A.The position must be held and moved outside the depository, so transfers run through the transfer agent on paper.Correct. Losing the book-entry route forces the physical delivery process back into the picture.
2. B.The firm must decline the deposit, because a broker-dealer may not carry issues of that kind for customers.Wrong. Nothing prohibits carrying the position; it is merely slower and more expensive to service.
3. C.The firm must have the issue made eligible before it can carry the position.Wrong. That status is set by the depository based on the characteristics of the issue and cannot be obtained on demand by a participant.
4. D.The certificate must be surrendered to the issuer and reissued in nominee name before it can be held.Wrong. Re-registration happens for other reasons but is not what the absence of eligibility requires.

Why: Depository eligibility determines whether a security can be immobilised at the central depository and transferred by book entry among participants. Issues generally have to be freely transferable and in a form the depository can service; issues that are not eligible must be held and moved the old way, with certificates and instructions handled through the transfer agent. That does not make the position impermissible to carry. It makes it a physical item, subject to good delivery examination, vault custody, periodic counts and the timetables that apply to paper. Once an issue does become eligible, the same position can be deposited and the physical handling falls away.