6 Trading and Settlement
Lodewijk van Setten
- Capital markets — Settlement — Investment business — Insolvency set-off
This chapter discusses the common organisational and structural aspects of trading venues, the responsibility of investment firms that execute trades, and the operation of settlement systems. In particular, it examines those protective features that mitigate settlement finality risks, that is, the risk that a settlement may not become final due to adverse claims or insolvency. The chapter first considers the relevant provisions of Markets in Financial Instruments Directive (MiFID) II regarding trading venues and trading obligations before describing the structure of settlement cycles, with a focus on how a cash (credit) transfer and a book-entry securities (credit) transfer operate. It then explains the importance of settlement finality and compares adverse claims sourced in law or equity with adverse claims sourced in the Insolvency Act 1986. Finally, it analyses the provisions of the Settlement Finality Directive for the protection of payment and settlement systems from participant insolvency.