Continuous Net Settlement (CNS): Overview, Advantages, Example

What Is Continuous Net Settlement?

Continuous Net Settlement (CNS) is a settlement process used by the National Securities Clearing Corporation (NSCC) for the clearing and settlement of securities transactions. CNS includes 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 process, reports are generated that document the movements of money and securities. This system processes most broker-to-broker transactions in the United States that involve 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 main advantage of CNS is that it minimizes 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 end of the day. During a typical trading day, large financial institutions and their clients may repeatedly go long and short on stocks and ETFs. Many 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 each day in the CNS process, eliminating counterparty risk. If something happened to an NSCC member during a trading day, the NSCC would be responsible for fulfilling the member's obligations. There were more than 3,480 NSCC member entries in 2021, and many of them were for divisions of a single company. The NSCC acts as a sort of "honest broker" between brokerages in the continuous net settlement process.

The CNS process helps the NSCC to reduce the value of payments exchanged by an average of 98% daily. Also, it is important to note that the NSCC generally clears and settles trades on a T+2 basis.

An Example of Continuous Net Settlement

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

If Fidelity has more clients buying than selling Apple’s stock, then they will have to get the shares from somewhere else. Fidelity's counterparty will be the NSCC rather than another brokerage. Fidelity may have more clients selling than buying shares of Apple later in the day, so they'll have to sell it to the NSCC.

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