Evaluate Trade Adjustments - Series 7

What is the settlement convention for U.S. Treasury securities trades (regular-way)?

Regular-way settlement is $T+1$ for U.S. Treasuries. U.S. Treasuries use T+1 settlement due to their high liquidity and to minimize counterparty risk in government securities trading.
What does DK mean in trade processing, and what is its core purpose?

DK means "Don't Know"; it rejects a trade report as not recognized/incorrect. DK allows a firm to formally dispute an unrecognized trade, preventing erroneous settlement and ensuring accurate records.
What is the standard share adjustment for a $2$ -for- $1$ stock split?

Shares are multiplied by $2$ . A 2-for-1 split doubles the shares to preserve the total position value while increasing share count.
What is the settlement convention for regular-way trades in listed equities (Series 7)?

Regular-way settlement is $T+1$ for equities. Under current SEC rules effective May 2024, regular-way equity trades settle on the next business day to reduce settlement risks and enhance market efficiency.
What is the immediate operational effect of a DK on a trade between two broker-dealers?

The trade is treated as not compared and must be resolved and resubmitted. A DK halts automatic settlement, classifying the trade as unmatched until discrepancies are corrected via negotiation.
What is the key risk unique to when-issued trading that firms must disclose?

Settlement can be delayed or canceled if the issue does not occur as planned. Disclosure of this risk is required to inform investors of potential non-delivery or changes if issuance terms alter or fail.
What does the ex-date (ex-dividend date) determine for a stock dividend payment?

The buyer on/after ex-date does not receive the dividend. The ex-dividend date establishes the cutoff for dividend entitlement, ensuring buyers on or after this date do not receive the payment, which goes to the seller instead.
After a $2$ -for- $1$ stock split, what is the new strike for a call with a $50$ strike?

New strike is $50 \div 2 = 25$ . In a 2-for-1 split, the strike halves to match the reduced per-share price post-split.
What is a when-issued (WI) trade in the context of new securities or reorganizations?

A trade in a security before it is issued and available for delivery. When-issued trades allow market participants to trade securities in advance, facilitating price discovery before actual issuance or reorganization completion.
What happens to the aggregate market value of a position immediately after a stock split?

It is unchanged immediately after the split (ignoring market movement). Stock splits adjust share count and price proportionally, leaving the total market capitalization unaffected absent other factors.
What is the standard price adjustment for a $2$ -for- $1$ stock split?

Price is divided by $2$ . In a forward split like 2-for-1, the price is halved to maintain proportional market value post-split.
What adjustment applies to shares for a $1$ -for- $4$ reverse stock split?

Shares are divided by $4$ . In a 1-for-4 reverse split, shares are reduced by the ratio to increase per-share value accordingly.
What is the standard option contract deliverable for an equity option before any adjustments?

A standard equity option delivers $100$ shares. Standard equity options are structured to cover 100 shares to standardize trading and facilitate market liquidity.
What is the effect of a cash dividend on an investor's cost basis in the stock position?

No cost basis adjustment for a standard cash dividend. Cash dividends are treated as return of earnings, not affecting the investment's original cost basis for tax purposes.
Which event ends when-issued trading and sets the delivery date for WI contracts?

The issue date (the date the security is actually issued). The issue date finalizes the security's availability, terminating WI status and triggering settlement for all outstanding contracts.
What is the general adjustment rule for option contracts after a stock split?

Contract size changes; strike price adjusts inversely to keep notional similar. Adjustments ensure the option's economic value remains equivalent by scaling deliverables and inversely adjusting strikes based on the split ratio.
What adjustment applies to price for a $1$ -for- $4$ reverse stock split?

Price is multiplied by $4$ . Reverse splits consolidate shares, multiplying the price by the ratio to reflect fewer outstanding shares.
What is the typical cost basis effect of a stock dividend or stock split on the position?

Per-share basis decreases; total basis stays the same. Stock dividends and splits distribute basis across more shares, reducing per-share basis while keeping total unchanged for tax reporting.
A customer buys $200$ shares at $30$ , then a $2$ -for- $1$ split occurs. What are the new shares and price?

$400$ shares at $15$ per share. A 2-for-1 split doubles shares and halves price to maintain equivalent total value post-adjustment.
Which error is most directly addressed by issuing a DK notice: wrong security, wrong side, or wrong quantity?

All of these; a DK is used when the compared trade details do not match. DK notices address any discrepancies in trade details, requiring resolution to confirm mutual agreement on terms.
In a $3$ -for- $2$ stock split, what is the new contract deliverable for a standard $100$ -share option?

New deliverable is $100 \times \frac{3}{2} = 150$ shares. A 3-for-2 split increases deliverables by $\frac{3}{2}$ to reflect additional shares issued, preserving option economics.
Identify the correct action when your firm receives a trade confirmation you did not execute.

Issue a DK (reject) and promptly contact the contra-party to resolve. Issuing a DK rejects the unexecuted trade formally, mandating communication to avoid settlement errors and comply with regulations.
After a $1$ -for- $5$ reverse split, what is the new strike for a put with a $10$ strike?

New strike is $10 \times 5 = 50$ . Reverse splits like 1-for-5 multiply the strike by 5 to correspond with the higher post-split share price.
What is the settlement convention for corporate and municipal bond trades (regular-way)?

Regular-way settlement is $T+2$ for corporates and municipals. Corporate and municipal bonds follow T+2 settlement to allow time for trade confirmation and processing in less liquid markets compared to equities.
In a $3$ -for- $2$ stock split, what is the new strike if the old strike was $60$ ?

New strike is $60 \times \frac{2}{3} = 40$ . For a 3-for-2 split, the strike is multiplied by $\frac{2}{3}$ to align with the increased shares and maintain contract value.

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