1. 1 Introduction to Securities Domain

2. 2 Objective Creation of a foundation in Securities Domain Exposure to terminology Understanding of basic products Understanding of trading markets and regulations Understanding of brokerage operations Encourage further exploration of topic areas Foundation for Domain Certification Course

3. 3 Part 1a: Introduction to Financial Instruments Stocks, Bonds, Derivatives, Packaged Products. Part 1b: Introduction to Financial Marketplace Market Development, Order Types, Stock Markets, Margin Trading. Part 2: Introduction to Brokerage Operations Execution, Settlement, Clearing Agenda

4. 4 Why does an institution need money? Establish New Business Expand Existing Business Pay off Existing Loans Buy other institutions The needs for capital are numerous, like those of any individual

5. 5 How do one raise capital? Equity – Share Ownership Shares / Stocks -High return, Liquidity, Capital appreciation, Limited Liability Debt – Take Loan Bond Offerings - Low Risk, Poor Hedge against Inflation, Fixed Yield Founders (friends and family) Banks Government Venture Capitalists Broker Dealers Founders (friends and family) Banks Government Venture Capitalists Broker Dealers Shares and Bonds are fundamental products. Other products are derived

6. 6 Equity – Stock terminology Authorized stock – Outlined in corporate charter Issued Stock (A)– The portion of authorized stock that is actually sold to investors by a corporation Treasury Stock (B)– Stocks that have been bought back by the company that issued them. Outstanding Shares – Stocks remaining with the various investors (A-B) Common Stock Preferred Stock Par Value / Face Value- Arbitrary value placed on common stock at the time of its authorization; Important only for accounting purpose Market Capitalization- Market value of the company’s stock = Share Price * Number of shares outstanding (Publicly held)

7. 7 Preferred Stock vs. Common Stock Preferred Stock Pays a fixed dividend Par Value No voting rights Acts more like bond than a stock In U.S. often bought by other corporations Has preference over common stock when it comes to Bankruptcy and Dividends Common Stock Junior Status Ownership Ease of Transfer Voting rights Dividends and /or capital growth Issuer gives up control (ownership) Investor may receive dividends/appreciation Common stock - Ownership; Preferred shares – No Ownership

8. 8 Sale of stock to public for the first Registration statement filed with Securities and Exchange Commission (SEC) Underwriting - The investment banker functions as an intermediary (Underwriter) between the issuing corporation and the investors Underwriter offers stocks to the general public and institutions for sale through selling group members (e.g. CSFBDirect) Prospectus Issue - Legal documents explaining the financial facts important to an offering;must precede or accompany sale of primary offering Issue subscribed to by investors Stock IPO – Primary Markets IPO – Initial Public Offering

9. 9 How can a company pay its shareholders? Stock Dividend – Giving more shares for existing shares at a predefined ratio eg. 2:1- Two shares for every one share currently held Stock Split – Break a share into multiple shares Cash Dividend – Give cash at a particular percentage of face value – 10% Dividend Shares Before Split Type of Split Shares After Split 1002 for 1200 1004 for 1400 1003 for 2150 1001 for 250 Objective is to increase liquidity and shareholder value

10. 10 American Depository Receipts Foreign country shares traded in US Bank purchases ordinary shares of the company Shares are deposited in a local custodian bank ADR issued by US depositary bank (e.g. BNY) ADR trade on U.S. exchanges. ADR Stock India US ADRs - Selling Foreign Shares in America indirectly

11. 11 Introduction to Bonds Bonds are debt securities sold by a company or government to raise money (Fixed Income Instruments) Bond holder becomes a Creditor but not owner of bond issuing corporation Bond holder receives interest yield in addition to principal amount Bonds characterized by finite life span (determined by Maturity period) Issuer is responsible for repayment of principal and interest Investor Issuer More Income Greater Safety Known Maturity Not an Owner Poor Inflation Hedge Control Issues Risk of Default “Leverage” in a Capital Structure Bond is the other fundamental product giving fixed returns

12. 12 Bond Terminology Par Value- The value of a bond assigned by the issuer; also called face value. Coupon - Paper that evidences an issuer's promise to pay interest when due Coupon rate- The interest as a percent of par paid by a bond Premium. The amount by which a bond sells above its par value Maturity date- The date on which a bond is to be redeemed and its principal and interest returned to the owner Yield- The rate of return on an investment, described as a percentage of the amount of the investment

13. 13 8% IBM Issuer $1,000 Face Amount $80/2 = $40 Semi-annual interest 1/15/25 Maturity Date Interest Payment dates are: 1/15 and 7/15 Semi Annual Bond in a Nutshell

14. 14 Bond Categories Issuer Based Categories Government Securities- Issued by The U.S. government from the U.S. Treasury and several government agencies. Outstanding securities on 01/19/2005 ---- $7,613,772,338,689.34 Corporate Bonds- Bonds issues by various corporations to borrow money for operations Municipal Bonds- Bonds issued by states, cities, counties and various districts to raise money to finance their operations or to pay for infrastructure projects. Convertible Bonds Bonds convertible into common stock Generally lower coupons as there is upside for investors

15. 15 Derivatives $1,000 Buy Today $1,200 One Month Later $ 850 One Month Later Pay $25 and Book TV Buy One Month Later Pay Today’s Price $ 175 Save $ 175 Lose There is no deal without a TV here – Fundamental Product

16. 16 Options Terminology Rights and Obligations (to buy or sell) Specific Stock (Round lot) Specific Time Frame (Expiration date) Specific Price (strike) Premium Reasons to buy Options Directional Speculation Volatility Speculation Protection of Stock Position Income Generation Getting out of options Liquidate or Buy Back in Market Exercise Expiration

17. 17 Option Buyer Option Writer “I have a Right” (Control) “I have an Obligation” (No Control) “I paid $” “I got paid $ ” Buyers Have rights “are in Charge” Pay for the privilege Sellers take on obligations “Are Passive” Get paid for their promise Options Trading

18. 18 Call Buyer Call Writer Right to Buy (Control) Obligation to Sell (No Control) Bullish Bearish Call Options Call Option – Right to Buy assumes price would go up

19. 19 Put BuyerPut Writer Right to Sell (Control) Obligation to Buy (No Control) Bearish Bullish Put Options Put Option – Right To Sell, Assumes Price to Go Down

20. 20 Rights & Warrants Rights Securities issued by corporation Shareholders maintain percentage ownership Rights offering and standby underwriting Warrants Right to buy shares of stock at a specific price. Warrants are issued by a corporation Warrants may be long-term or perpetual. Attached to bond or part of unit Low cost capital raise Rights and Warrants - Issued by Corporation, not between two parties

21. 21 Mutual Funds Pool of Investors Money Financial Expert Manages money Buys Multiple Company Shares Investors own units that are priced proportionately Value of units change based on fluctuations in share prices Dividends and Capital Appreciation Diversification at low cost StockNumberMarket PriceTotal Price IBM100$ 20$ 2,000 MSFT200$ 30$ 6,000 Oracle500$10$ 5,000 Total--$13,000 No. of Units1000 Per Unit Price$ 13 Mutual Funds – Owning shares indirectly

22. 22 Fund Terminology Net Asset Value - The value of a single unit of the fund determined on a daily basis Management fee - The fee charged to compensate those who run the fund's portfolio; Approximate around one percent of the fund's assets Fund Types - Sales Charges i.e. fees payable while buying/redeeming shares in the fund Front end load Funds- Charges levied when shares in the fund are purchased Back end load Funds- Charges levied when shares in the fund are redeemed No load Funds- No sales charge Fund Types - Continuous / Time Bound Open end funds- Issue new units continuously as investors buy them. Investors redeem their units directly to the fund, Closed end funds- Issue a fixed number of units. Fund may redeem only upon termination of the fund's trust. Unit holders may sell their units to other investors.

23. 23 Annuities Guarantees returns over a period of time, based on initial investment Monthly income plan, Purchasing power risk Fixed Annuities Money invested in general account Pays a fixed monthly income at retirement Variable Annuities Pays variable monthly payment at retirement Investment risk Immediate or deferred Payout

24. 24 Reading Material http://www.brokerage101.com/ - Section on Marketable Securities http://www.brokerage101.com/ http://www.invest-faq.com/ http://www.fool.com http://www.investopedia.com http://stocks.about.com/ - Equitieshttp://stocks.about.com/ http://mutualfunds.about.com/ - Mutual Funds http://mutualfunds.about.com/ http://www.annuityfyi.com – Annuities http://www.annuityfyi.com - Futures and Options http://stocks.about.com/od/bonds/ - Bonds http://stocks.about.com/od/bonds/

25. 25 Financial Marketplace Development of Trading Markets Order Types Secondary Markets NYSE NASDAQ Margin Trading

26. 26 Buy 300 shares @ $19.50 Sell 500 shares @ $20.25 Potential Buyer = Bid Potential Seller =Ask Buyers and Sellers exist like any other market “Bidders” are Buyers “Askers” are Sellers Difference between the Bid and Ask is the Spread Market Development Price Differences prevent a deal

27. 27 Buy 750 shares @ $20.00 Sell 500 shares @ $20.25 Potential Buyer = Bid Potential Seller =Ask New bidders and Askers enter Old Bidders and Askers exit Existing Bidders and Askers change price and quantity Market Development Prices match ultimately for a deal; Volume Not necessarily

28. 28 Trading Positions Long position - Buy Followed by Sale Securities owned by an investor Short Position – Sale Followed by Buy Securities not owned by an investor, Relevant only when you sell Selling Short - The sale of a security that the investor does not own in order to take advantage of an anticipated decline in the price of the security. To sell short, the investor must borrow the security from his broker in order to make delivery to the buyer The short seller will eventually have to buy the security back, or buy to cover, in order to return it to the broker In the long run, any investor is expected to close the position

29. 29 Market Order CUSTOMERSIZEBIDS (BUYERS) Hard Line Brokerage30,000$ 60.00 Top Notch Advisors15,000$59.95 Reckless Securities Inc25,000$59.89 Lighting Execution Inc20,000$59.81 Rumor Mill Brokerage10,000$59.73 HI IQ Capital30,000$59.65 Order to buy or sell a stock as soon as possible at the best price available “Sell 100,000 Shares at the Market”

30. 30 “Buy 100,000 Shares at the Market” CUSTOMERSIZEOffers (Sellers) Blue-Chip Brokerage30,000$60.00 EZ Trade Corporation15,000$59.85 Walck Discounters5,000$59.80 Klick Quick Trade35,000$59.60 Halasy Investors15,000$59.55 Murphy Retail Investors30,000$59.40 Market Order Price, Time, Quantity – Order of Preference for any trade Order Format - XYZ, Sell, 100

31. 31 Limit Orders Placing a price parameter on order Not guaranteed execution, but if executed, will receive a better price than the current market price. Order to buy or sell a stock only at the specified price (the limit price) or better; Safer way for trading Format for order XYZ, Sell, 100, $20.25 $18.50 $18.75 $19.00 $19.50 $20.00 $20.25 $20.50 Current Price Buy Limit Orders Sell Limit Orders Buy limit price Current market price

32. 32 Sell Stop Order $20 $18 Sell Stop Order (stop-loss order) Buy @ Market Used to protect a long position Placed below the market Two Step Process: 1. “Activation price” or “Trigger price” 2. Once “activated”, it becomes a market order Order Format – XYZ, Sell, 100, $18 Market Price could be $ 20

33. 33 1. Buy 100 XYZ @ the market price of $20.00 (long position) 2. Places the following order to protect his long position: Sell 100 XYZ $18.00 stop GTC Three days later the following trades take place: Activation Price / Execution Price ? $18.25 Open $18.15$18.05$18.00$17.90$17.85$17.75 Sell Stop Order

34. 34 Buy Stop Order $22 $20 Short Sale Buy Stop Order Used to protect a short position Placed above the market Two Step Process: 1. “Activation price” or “Trigger price” 2. Once “activated”, it becomes a market order Order Format – XYZ, Buy, 100, $22 Market Price could be $ 20

35. 35 1. Sell Short 100 XYZ @ the market price of $20.00 (Short position) 2. Places the following order to protect short position: Sell 100 XYZ $22.00 Stop GTC Three days later the following trades take place: Activation Price / Execution Price ? $21.75 Open $21.85$22.00$22.10$22.15$22.25$22.30 Buy Stop Order Stop-Limit Order- Like a stop Order but after activation becomes a limit Order instead of Market Order

36. 36 More Order Types All-or-None Order (AON) No partial executions Broker has all day to execute order (no urgency) Immediate-or-Cancel Order (IOC) Partials are acceptable Fill immediately (urgency), and cancel unfilled balance Fill-or-Kill Order (FOK) Fill immediately No partials If entire order cannot be filled immediately, then cancel order Day Order Good for the day If not executed within the course of day, order is canceled. GTC Order Also known as an “open order”. Order is in effect until executed or canceled by the customer

37. 37 CUSTOMERSIZEOffers (Sellers) Blue-Chip Brokerage30,000$60.00 EZ Trade Corporation15,000$59.85 Walck Discounters5,000$59.80 Klick Quick Trade35,000$59.60 Halasy Investors15,000$59.55 Murphy Retail Investors30,000$59.40 All Fall in Line Building Block for a stock exchange Someone records and tracks order information to ensure the best deal for everyone

38. 38 Quiz I placed a sell order for CSCO, even though I never bought any shares of CSCO. What have I done? Bought GOOG at $230, am hoping it will go up, but I also want some protection in case it goes down, what can I do? If MSFT issues 85 Million shares and decides to buy back 6 Million shares, how many shares are outstanding in the market? How many shares of MSFT are authorized in the above case? What is the market capitalization of MSFT if the market price is $10 per share? If MSFT declares a 10% dividend, what amount would I get if I own 2000 shares?

39. 39 Securities and Exchange Commission (SEC) www.sec.gov Responsible for administering and enforcing the federal securities laws, and regulating brokerage firms, investment companies and advisers Ensures orderly market performance and information availability to investors Establish accounting norms for securities transactions National Association of Securities Dealers (NASD) www.nasd.com Works to aid and safeguard investors by regulating markets, formulating guidelines, facilitating dispute resolution and monitoring member activities Regulatory Bodies

40. 40 Stock Market Players Broker – A person or firm that facilitates trades between customers Acts only as an intermediary and does not assume risks for the trade Charges commissions Dealer – A person or firm that buys and sells from his or her own inventory of securities as well as for others Assumes risk for the transactions Marks securities up or down to make a profit on their transactions Registered Representatives – An individual who has passed the NASD's registration process and is therefore licensed to work in the securities industry Follows NASD rules. Usually a brokerage firm employee acting as an account executive for clients Sell to the public; they do not work on exchange floors

41. 41 Secondary Markets - Market for outstanding issues OTC MarketsExchange Markets Hybrid Market Stock Exchange (NYSE, AMEX etc)  Private association of brokers  Auction type of trading  Central meeting place where members trade in listed securities Over the Counter (OTC) market (NASDAQ)  Negotiated market, without a central trading floor  Composed of network of brokers and dealers  Bid/ask quotes given by market makers Market Classification

42. 42

43. 43 Exchange Markets Auction Markets Specialists Centralized Listing standards NYSE is the model NYSE - SRO

44. 44 The New York Stock Exchange

45. 45 What does the NYSE do? Trading and trading services NYSE charges (directly and indirectly) for trades that occur and for software supplied to its members. Listing To be listed on the NYSE, a corporation must meet/maintain certain financial standards and pay listing fees. An NYSE listing is a certification that enhances a firm’s credibility. Information NYSE is (indirectly) an information vendor. Regulation NYSE monitors and regulates the trading activity of its members. Through the listing relationship and the listing standards, it can affect corporate governance behavior. Other Information Traditional Auction Market with 2800 Companies Listed and 460 Non US Listings from 48 countries Listings war with NASD / Overseas markets Ownership Structure-1366 Seats (constant since 1953)

46. 46 Specialist Role The Post Each security is assigned a particular spot on the trading floor. All activity for each security takes place at the security’s post through open outcry. The specialist as auctioneer The specialist may act as either principal or agent Role of the Specialist Maintains a fair and orderly market Provides liquidity Resolves order imbalances Floor Brokers Act in an agency capacity No risk is assumed on transaction Compensation is a commission

47. 47 OTC Markets Transactions that occur off the floor of an exchange Negotiated Market Market makers Decentralized Nasdaq is the model for OTC markets NASD – SRO Not face to face Bids and offers entered via phone or computer Market Makers willing to sell or buy

48. 48 NASDAQ

49. 49 NASDAQ ? Electronic communication and execution network Market Makers post prices to buy and sell Think of shopping @ 100s of stores Inventory of stocks Computer automatically finds the best prices- inside market Nasdaq is an NASD operated electronic quote system. Two tiers of Nasdaq: 1. Nasdaq National Market (NNM) 2. Nasdaq SmallCap 2872 Company Listings 11,000 registered traders with 790 firms 1.2 million terminal users in 82 countries

50. 50 Role of the Market Maker A Dealer Market uses multiple dealers, known as Market Makers. Compete for investor orders Commit capital Maintain inventories Seek the other side of a trade Trade on both sides of the market Generate investor interest

51. 51 Margin Trading A process whereby a brokerage client uses credit to finance securities transactions Allows its clients to buy securities with money borrowed from the broker Margin requirements can be met by the investor with cash, eligible securities, or any combination thereof Governed by regulations of Federal Reserve, NYSE and the brokerage firm’s internal rules Not all securities can be traded through margin account- Federal Reserve Board specifies “Margin securities” i.e. securities eligible for trading through Margin account Margin Account - Collateralized loan from a broker-dealer regulated by Reg T

52. 52 CustomerBroker Bank Rehypothecation Hypothecation Call Loan RateMargin Interest Rate Margin Trading Process

53. 53 Quiz I placed a market order for AAPL, but my order did not find its way into the specialists’ book. Why? If you own a security, would you ask for an ASK or a BID quote? Name one auction exchange in the US? Name one OTC exchange in the US? If a $1000 15-year par value bond paying 6% semi-annual coupon is selling in the Market at $1007, is the bond selling at a Premium or at a discount? In the above case, what is the coupon amount that the investor receives every 6 months? If I have a put option on BONY / BK at $29 today and the market price is $32.20, should I exercise the option?

54. 54 Part 2 – Brokerage Operations Execution Processes Clearing Processes Settlement Processes Post Settlement Processes Benefits of Outsourced Clearing

55. 55 Stock Trading : A Client Perspective What’s so difficult about buying and selling stock?

56. 56 The Reality Trade processing is complex Many different areas of a firm are involved in a trade Trade processing methodologies grew up in a paper-driven environment. Complex system of checks, double checks and triple checks to safeguard the firm and client Today: Intermediaries (e.g. Pershing; DTCC) Brokerage Services is a multi-billion dollar industry Old World Examination of trade processing in a paper-based environment Low volume Trade by trade settlement Firms deals directly with one- another Slower and volume sensitive Modern World Examination of trade processing in an electronic environment High volume Net settlements Firms deal with Centralized Counter party Volume insensitive and high speed

57. 57 Life of a Trade OrderSettlementExecutionClearing

58. 58 Pershing’s View 4.Trade Agreement 3.Trade Allocation 2.Trade Processing 1.Order Management

59. 59 Order Initiation Order Capture Order Handling Order Routing Execution Match and Reporting Execution Order Creation Incoming Orders Solicited by RR or at client’s direction In person Phone Call Internet Solicitation or Receipt of Customer Orders is Order Initiation

60. 60 Order Ticket Information Purchase or Sale Long sale vs. Short Sale Security Quantity Type of order (market/limit/stop) Solicited vs. unsolicited RR Identifier GTC or day Obtaining correct information is critical for execution and other subsequent activities SELL

61. 61 Order Capture Order Initiation Order Capture Order Handling Order Routing Execution Match and Reporting Execution Order Creation More Work Prior to placing the Order (System checks & Reviews) Internal checking of order Is the “ticket” filled out correctly? Is all information there? Is client cleared to do this type of trading? Does the client have sufficient assets ($/securities) in account? (credit limits) Shorting? Are securities available?

62. 62 Order Handling Order Initiation Order Capture Order Handling Order Routing Execution Match and Reporting Execution Order Creation Order Rooms Receipt of incoming orders from RRs Branch level or centralized for entire firm Organize pending orders based on security type, market, client type, size, etc. Determination if trade is internal or goes to the street

63. 63 Dealer or Principal Capacity Subject to risk on transaction Mark-up or markdown Broker or Agency Capacity No risk on transaction Commission

64. 64 Order Routing Order Initiation Order Capture Order Handling Order Routing Execution Match and Reporting Execution Order Creation Routing Client’s preferences? Broker Dealer’s preferences? Routing to NYSE floor Regional exchange Relationships with specialists Speed vs. Liquidity vs. Cost Execution occurs at this stage

65. 65 Life of a Trade OrderSettlementExecutionClearing

66. 66 Execution Match and Reporting Order Initiation Order Capture Order Handling Order Routing Execution Match and Reporting Execution Order Creation Internal Receipt of execution reports from trading venue Tie together orders and executions Correct security / quantity / client? Clean up of execution errors Research of un-entered/unexecuted orders SRO Report of executions to SRO Exchanges have systems to track executions SROs looking for violations/patterns Client Record executions (partial or full) Report executions to RR Report NDs to RR RR gives verbal/email report to client

67. 67 Execution Order Creation Before We Leave the Order Room Order – Potential Business Execution is contract between the BD and contra firm BD-to-client transaction is a separate agreement Clients do not transact business on NYSE or NASDAQ! Order Initiation Order Capture Order Handling Order Routing Execution Match and Reporting Execution Order Creation

68. 68 Life of a Trade OrderSettlementExecutionClearing

69. 69 Clearing Operations 4.Trade Agreement 3.Trade Allocation 2.Trade Processing 1.Order Management Recording of executions Computing monetary amounts Comparison of trades with contra broker Confirmation of trade with client Booking

70. 70 Trade Validation Trade Enrichment Street Side Submission Trade Matching (Customer and /or street) Trade Exception Handling BDs, branches, RRs all given distinct identifiers Securities have CUSIP #s Think of a CUSIP as a barcode which contains issuer and issue identifiers Trade itself is given transaction (ID) # Contra-brokers have ids If problem: Exception

71. 71 Trade Enrichment Trade Validation Trade Enrichment Street Side Submission Trade Matching (Customer and /or street) Trade Exception Handling Adding Information Commissions/mark-up or mark down Sec fees Taxes Regulatory Disclosures The end result is a “fully figured trade ”

72. 72 Street Side Submission Trade Validation Trade Enrichment Street Side Submission Trade Matching (Customer and /or street) Trade Exception Handling Comparing the details Comparing trades with contra broker Old days: trade-by-trade or itemized comparison Street acknowledgement of trade If OK trade is affirmed or “locked in” Details may differ (uncompared) Contra broker does not know the trade Right security/right contra-party?

73. 73 Trade Matching Trade Validation Trade Enrichment Street Side Submission Trade Matching (customer and street) Trade Exception Handling Notification-Generating a Customer Confirm Trade particulars (security price, size, etc) TD/SD Where / when executed Capacity in which the form acted Cash or Margin SRO Rule: Customer confirms must be generated by completion of the transaction

74. 74 Trade Exception Handling Trade Validation Trade Enrichment Street Side Submission Trade Matching (Customer and /or street) Trade Exception Handling Trade Problems Looking for problems (exceptions) Wrong stock / Bond ( maturity)/ Quantity Problem “real” (error) or “typo” (discrepancy)? Does the problem affect contra-broker? Can the trade be repaired? Cancels and re-bills “As of” Trades and Corrections Fixing a customer/contra broker problem Trades mistakenly not entered Execution problems Error accounts Internal corrections and or contra broker notification Compliance Notification - Is a client being showed favoritism Does a particular RR/trader/branch exhibit a pattern? Is there a system problem?

75. 75 Clearing Operations 4.Trade Agreement 3.Trade Allocation 2.Trade Processing 1.Order Management Block Trades Investment Managers (MFs etc) Individual clients selected A given trade may be split up and confirmations generated to many clients

76. 76 Clearing Operations 4.Trade Agreement 3.Trade Allocation 2.Trade Processing 1.Order Management  Booking - Everyone agrees the trade is now processed and balanced or booked into the firms records

77. 77 Life of a Trade OrderSettlementExecutionClearing

78. 78 If Trade Clears: Goal = Settlement Settling Compared Trades On settlement date, the selling broker delivers to the buying broker and gets paid (formerly trade-by-trade) Firm to Firm transfer $ vs. securities

79. 79 Can Clients Cause a Failure to Settle? Firms agree on trade particulars Client (seller) does not deliver Client (buyer) does not pay Settlement will still occur…. Contract is between firms! Analyze reasons for fails Record keeping to age items One “fail” may affect multiple trades Fails cost $ Issue buy-in to client or street Obtain stock from safekeeping or stock loan

80. 80 Post Settlement Events Cashiering (Cash Management) Receipt/disbursement of client funds Receipt/disbursement of contra broker funds Checks Fed Funds Credits or debits internally Third party payments Accounting Keeps track of the cash - daily cash record Invoicing and payments Trial balance - monthly P&L statements Balance sheet Regulatory reports

81. 81 Post Settlement Events Stock Record Record of positions Tracking movements Identification/investigation of Breaks Auditing positions - physical vs. stock Record Client Records (Customer Reporting) Statements Tax reporting P&L (cost basis etc) SEC/SRO Records (Regulatory Reporting) Net capital Operational Issues Client extensions $ Laundering Complaints

82. 82 Corporate Actions Communications Receive information from Issuer / DTC etc. Review Information (Prospectus / Letter) Mailing Announcements Communications with depositories or agent banks Outcomes Receipt of customer instructions Research and reconciliation of exceptions Stock record must be consulted Crediting/debiting accounts for $/stock Examples Mergers, Spin-offs, Splits / Reverse splits Cash and stock, Interest allocations, Rights offerings Calls, Proxies, Dividends, Voting

83. 83 Why Not Self-Clear? Cost Issues - Inefficient; Cheaper to Outsource Financial Benefits - Cheaper cost of funds (margin), Stock loan opportunities, Reduced net capital Needs, Reduction of contra party risk, Bulk buying opportunities Reduced Paperwork – Confirms, Statements, Mailings, Proxies, Tax Reports Regulations Concerns / Compliance - Patriot Act /Money Laundering, Trade Monitoring, Net Capital Issues, 144 Sales/Accounts of Deceased/Accts -Associated Persons Activities, DNC Lists, Archiving Records Technology Advantages - Access to trading software, Data feeds (News and Quotes), Access to ECNs, Trading Technology/Relationships, Access to risk management software (Trading), Client profiling software (Compliance) Client Peace of Mind Why Hire Pershing? (Why Third Party Clearing Services?) Saves time and $ Think of clearing on a unit cost basis Permits small firms to focus on what they do best (Sales and/or Trading)

84. Q&A 84