Continuous Net Settlement (CNS)

What Is Continuous Net Settlement?

Continuous Net Settlement (CNS) is a settlement cycle utilized by the National Securities Clearing Corporation (NSCC) for the clearing and settlement of securities transactions. CNS incorporates a centralized book-entry accounting system, which keeps the flows of securities and money balances orderly and efficient.

Understanding Continuous Net Settlement (CNS)

During the CNS cycle, reports are generated that document the movements of money and securities. This system processes most dealer to-facilitate transactions in the United States that include equities, corporate bonds, municipal bonds, American depositary receipts (ADRs), exchange-traded funds (ETFs), and unit investment trusts. NSCC is a subsidiary of the Depository Trust Clearing Corporation (DTCC).

Advantages of Continuous Net Settlement (CNS)

The primary advantage of CNS is that it limits the exchange of securities between counterparties. NSCC member positions in each issue are netted into a single long position and a single short position at the day's end. During a typical trading day, large financial institutions and their clients may repeatedly go long and short on stocks and ETFs. A large number of these trades ultimately cancel each other out but generate a significant volume of trade between individual shareholders.

The NSCC is the counterparty for members during every day in the CNS cycle, eliminating counterparty risk. On the off chance that something happened to a NSCC member during a trading day, the NSCC would be responsible for satisfying the member's obligations. There were in excess of 3,480 NSCC member entries in 2021, and a significant number of them were for divisions of a single company. The NSCC acts as a sort of "honest representative" between brokerages in the continuous net settlement process.

The CNS cycle assists the NSCC with decreasing the value of payments exchanged by an average of 98% daily. Likewise, it is important to note that the NSCC generally clears and settles trades on a T+2 basis.

An Example of Continuous Net Settlement

Assume you have a brokerage account at Fidelity and buy 100 shares of Apple (AAPL). Your order will execute rapidly, and your account will show ownership of the shares.

In the event that Fidelity has a greater number of clients buying than selling Apple's stock, they should get the shares from elsewhere. Fidelity's counterparty will be the NSCC rather than another brokerage. Fidelity might have a bigger number of clients selling than buying shares of Apple later in the day, so they'll need to sell it to the NSCC.

Trades between Fidelity and the NSCC will happen repeatedly. Most of these sales and purchases will eventually cancel each other out. At the day's end, Fidelity will have a single long and a single short position in Apple's stock under the CNS system.

Highlights

• NSCC member positions in each issue are netted into a single long position and a single short position at the day's end.
• The principal advantage of CNS is that it limits the exchange of securities between counterparties.
• The NSCC is the counterparty for members during every day in the CNS cycle, eliminating counterparty risk.
• Continuous Net Settlement (CNS) is a settlement cycle utilized by the National Securities Clearing Corporation (NSCC) for the clearing and settlement of securities transactions.