Investment Company and. Variable Contracts Products Principals (Series 26) Practice Exam

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What is required for cash settlement when a trade is executed?

Delivery of securities on the next day
Delivery of securities on the same day
Payment from the buyer on the next day
Delivery of securities and payment from the buyer simultaneously any time

The correct answer is: Delivery of securities on the same day

For cash settlement when a trade is executed, the requirement is that delivery of the securities must occur on the same day as the execution of the transaction. This means that when a buyer and a seller agree to a trade, the buyer must receive the securities immediately while making payment concurrently. The principle behind cash settlement is that it provides a quicker resolution to trades, which is essential in maintaining liquidity and efficiency in the market. The buyer's payment and the seller's delivery happening at the same time helps mitigate credit risks and aligns with the goals of various cash markets. In contrast, settling trades on the next day or allowing delayed payments does not conform to the immediate need for liquidity and can potentially expose participants to additional risks. This immediate cash settlement ensures that both parties fulfill their obligations right away, reflecting the nature of cash markets.