Bondholders have deposited their bonds with a depositary pending a reorganization and hold certificates evidencing the deposit. How does one of them transfer that interest to a buyer?

By transferring the certificate, which is the tradeable instrument while the deposit lasts

By instructing the depositary to release the underlying bonds and delivering those

By assigning the deposit agreement, the certificate being evidence rather than an instrument

By waiting for the reorganization to complete, no transfer being possible before then

FINRA Rule 11364 provides that units of delivery for certificates of deposit for bonds are as prescribed for bonds. How much of the bond framework does that bring across?

The whole of it, except the ceiling on registered denominations, which deposited bonds escape

The whole of it, every paragraph applying to the certificate as it would to the underlying bonds

Only the coupon bearer paragraph, since bonds placed on deposit are held in bearer form by the depositary in every case

Only whichever paragraph the deposit agreement identifies as governing the deposited bonds

A certificate of deposit for bonds represents a specific principal amount of an underlying bond, denominated in whatever increments that bond itself carries. What would giving such certificates their own separate denomination framework produce?

A framework better suited to the reorganization context in which such certificates arise

A simpler rule, since the certificate's own terms could then be stated in one place

An artificial mismatch between the certificate's denominations and the underlying bond's

A framework that would apply equally to depositary receipts over foreign equity securities

FINRA Rule 11364 incorporates the bond denomination framework by reference rather than restating it. What follows if that bond framework is later amended?

The Committee must issue a ruling confirming that the amendment reaches deposited bonds

FINRA Rule 11364 continues to apply the framework as it stood when the certificates were deposited

FINRA Rule 11364 must be separately amended to reflect the change before it takes effect

The amendment carries forward automatically, without FINRA Rule 11364 being amended at all

Several rules of the Uniform Practice Code consist of little more than a pointer to another rule's framework. What does the Code achieve by drafting them that way?

Coverage of the additional category without restating a framework that already exists elsewhere

The ability to apply the framework only prospectively, from the date of the pointing rule

An express delegation to the Committee to resolve how far the incorporated framework reaches

A narrower application than a restated framework would have, since a pointer binds less firmly

Against a $1,000 contract in certificates of deposit for bonds, the seller tenders two certificates, one for $250 and one for $750. Does the tender meet the units of delivery?

Yes; the two certificates together equal the $1,000 contract amount, and that total is what the units of delivery measure

No; a split delivery must use pieces of $100 or multiples of $100, and $250 and $750 are neither

Yes, provided the buyer raised no objection to a split delivery when the two members made the contract

No; each piece of a split delivery must be exactly $100, so the contract needs ten certificates

A seller owes $500,000 principal amount of certificates of deposit whose deposited bonds are fully registered, and it holds one certificate for the whole $500,000. What is the position?

It can tender that certificate, the $100,000 limit reaching certificates that represent coupon bonds instead

It can tender that certificate, registered denominations running in any multiple of $1,000 without a ceiling

It cannot tender that certificate, but the contract can still be delivered in certificates of $100,000 or less

It cannot tender that certificate, and the contract itself must be cut to $100,000 or less to be deliverable

A unit investment trust security is delivered in whole units, one unit being the minimum. How is a contract in certificates of deposit for bonds measured when it is delivered?

In whole certificates, each certificate being the minimum unit of delivery just as a single trust unit is

In the number of bonds held on deposit, the seller delivering one certificate for each bond the depositary holds

In lots of ten certificates, a lot being the trading unit the issuing depositary sets for its own certificates

In dollars of principal, through bond denominations, however many certificates it takes to make up the amount

Certificates of deposit for bonds did not arise as an ordinary financing instrument. What circumstances produced them?

Bond reorganizations and exchange offers, where holders deposited bonds under a deposit agreement

Treasury auctions, where successful bidders received certificates pending settlement of their bids

Bank time deposits, the certificate being a transferable claim on the depositing bank's reserves

Municipal escrow arrangements, where issuers deposited refunding proceeds with a trustee

A seller's certificates of deposit for bonds are not on deposit at any securities depository, and it cannot deposit them before the depository's cut-off date for the issue. How is its delivery to the buying member made?

By book-entry once the certificates are deposited after the cut-off date, the delivery date moving to suit

By handing over the certificates physically, in the denominations the bond units of delivery set

By handing over the certificates physically, in whatever denominations the two members agree between them

By a cash settlement in place of the certificates, the contract being closed out on the cut-off date

A member sold certificates of deposit for bonds on a seller's option. Wanting to deliver before the option expires, it hands the purchaser written notice of its intention to deliver on the morning of the day it tenders the certificates. Has it met the condition for delivering early?

Yes; notice handed over before the tender on the same day gives the purchaser the warning the rule calls for

Yes; a seller's option leaves the day of delivery to the seller, so no advance notice condition applies to it

No; the written notice had to be delivered on a business day before the day of the delivery

No; an early delivery on a seller's option also needs the purchaser's written consent, whatever notice is given

A seller tenders part of the certificates of deposit for bonds due on a contract, and the purchaser refuses them, arguing that the part-delivery requirement is a rule about stock. Is the purchaser right on that ground?

No; the part-delivery requirement is written for any contract due, which takes in a contract in these certificates

Yes; the requirement reaches contracts in shares of stock, its proviso being framed around odd lots of stock

Right only where the part tendered is under the $1,000 bond unit, smaller parts falling outside the requirement

Yes; a part delivery of certificates of deposit needs the issuing depositary's consent before it may be tendered

A member holds certificates of deposit for bonds alongside warrants. The two are physically separate instruments and each can be transferred on its own. Which further fact would take them outside the good practice of quoting and dealing in them separately?

The certificates and the warrants having been issued together, as one package, in the same reorganization

A legal or technical condition requiring the certificates and the warrants to be kept together

The member having bought the certificates and the warrants from one counterparty in a single trade

The warrants trading at a price that is small compared with the certificates' principal amount

A member sold certificates of deposit for bonds on a seller's option and plans to deliver early on a Thursday, a business day before the option expires. On the Tuesday it sends an electronic mail to the purchaser's office stating its intention to deliver. The purchaser says an electronic mail is not written notice. Is the purchaser right?

Yes; an electronic mail becomes written notice only once the purchaser has confirmed in writing that it received it

Yes; notice of intention to deliver must be handed over on paper at the purchaser's office, which a message cannot do

No; written notice as the Code uses the term includes electronic mail, so the message is written notice

No; a seller's option gives the seller the choice of delivery day, so no notice of intention is needed in the first place

A buyer sends notice that it will buy in $50,000 principal amount of certificates of deposit for bonds. Once the seller has that notice, it delivers $20,000 principal amount, the buyer takes it, and no more arrives by the time the notice states. What may the buyer then purchase to close the contract?

The whole remaining $30,000 in a single purchase, a buy-in having to cover everything still undelivered at once

All or part of the full $50,000, since a delivery made after the notice is not counted against the amount it requested

Nothing under this notice, accepting the $20,000 having cancelled it, so a fresh notice must first be given

All or part of the remaining $30,000, the $20,000 counting as delivered pursuant to the notice

Member A bought certificates of deposit for bonds from Member B, and Member C owes Member B the same certificates. After Member A serves its buy-in notice on Member B, Member B passes it to Member C as a re-transmitted notice before the buy-in is executed, but it reaches Member C only after Member A has executed the buy-in against Member B. The members have agreed nothing on the point. What may Member B do about its contract with Member C?

Promptly re-establish that contract with Member C by a new sale

Nothing; the execution against Member B closed out that contract, and the close-out stands whenever Member C received the notice

Buy in the certificates against Member C at once without notice, the late receipt being Member C's risk alone

Require Member A to reverse its buy-in, because Member C did not have the notice in time to deliver

A buy-in of certificates of deposit for bonds is executed after the original buy-in notice was passed down a chain of members as re-transmitted notices. Besides the party for whose account the certificates were bought, who must be told of the execution?

No one further; each member in the chain learns of the execution from its own counterparty

The Uniform Practice Code Committee, which then informs each member in the chain of the execution

The succeeding parties to which re-transmitted notices were issued, by the same procedures

The registered clearing agency for the issue, which passes the notice to every member in the chain

Two members traded certificates of deposit for bonds that are the subject of an exchange offer whose surrender deadline falls after the contract's settlement date. The trade was compared and settled directly between them and is not subject to any exchange's or clearing agency's buy-in requirements. The receiving member participates in a registered clearing agency with an automated service for notifying a failing party of its liability; the delivering member does not. How must the receiving member send its Liability Notice?

By written or electronic notice having next-day receipt capabilities, sent no later than the offer's cutoff time

Through the automated notification service, the receiving member's own participation being what that route requires

By telephone, a call giving the immediate receipt the rule looks for, with no written notice to follow

A receiving member initiates a Liability Notice on a contract in certificates of deposit for bonds. What does FINRA Rule 11810 expect of the member as a result?

That it be prepared to document the request for which it initiated the Liability Notice

That it file a copy of the Liability Notice with the Uniform Practice Code Committee

That it obtain the delivering member's written acknowledgement of the Liability Notice

That it confirm the request to the delivering member by telephone on the following day

Member A bought certificates of deposit for bonds from Member B for cash, and nothing was delivered on the day of the trade. The contract is within FINRA Rule 11810, and on the next day Member A buys the certificates in without notice during normal trading hours. What does Member A owe Member B once the buy-in is executed?

Nothing; a buy-in that may be made without notice is also excused from notifying the quantity and price once executed

Notification to Member B of the quantity purchased and the price paid, which is owed after an executed buy-in in all cases

Notification of the quantity and price only if Member B asks for it, a cash buy-in carrying no duty to notify unprompted

Notification of the quantity and price to the Uniform Practice Code Committee, which then passes them on to Member B

Under an exchange offer for certificates of deposit for bonds, holders must surrender their certificates by a Monday, and the offer carries a protect period ending on the Thursday of that week. Two members, whose trade is compared and settled directly between them and is within FINRA Rule 11810, have a contract in the certificates settling on the Tuesday. May the receiving member deliver a Liability Notice?

No; the last day for surrender, the Monday, falls before the Tuesday settlement date, so the condition is not met

No; a Liability Notice is open only where the offer itself, without any protect period, outlasts the settlement date

Yes; the expiration date is the Thursday, the protect period's last day, which falls after the Tuesday settlement date

Yes; a contract in securities subject to an exchange offer qualifies whatever its settlement date is

Certificates of deposit for bonds are subject to an exchange offer. On a members' contract in them, the receiving member sent the delivering member a Liability Notice that complied with FINRA Rule 11810. The delivering member fails to deliver on the expiration date, and damages accrue to the receiving member. When the receiving member claims them, the delivering member objects that it received only a Liability Notice and was never told of any claim. Does the objection succeed?

Yes; a Liability Notice reserves the right to buy in later, so the claim for damages needed a separate notice of its own

Yes; damages are owed where the receiving member executed a buy-in, and a Liability Notice is not a buy-in of any kind

No, but only because the delivering member later agreed in writing that the Liability Notice would count as a claim

No; the Liability Notice itself served as the receiving member's notification of the existence of a claim for damages

The holder of a certificate of deposit for bonds does not hold the bond itself: it holds a certificate showing that the bond has been lodged with a bank or trust company, the certificate representing its interest in the lodged bond. Which other instrument rests on a conceptually similar arrangement?

An American Depositary Receipt, an interest in foreign shares that a bank holds

A banker's acceptance, a time draft whose payment a bank has guaranteed

A due bill, a seller's promise to pass on a distribution it later receives

A when-issued contract, a commitment to deliver a security not yet issued

A seller owes $25,000 principal amount of certificates of deposit for bonds and holds one certificate for the whole $25,000. Whether that single certificate may make up the delivery depends on the form of the deposited bonds. Which statement is right?

It may if the deposited bonds are in coupon bearer form, but not if they are fully registered

It may if the deposited bonds are fully registered, but not if they are in coupon bearer form

It may whether the deposited bonds are fully registered or in coupon bearer form alike

It may not, whether the deposited bonds are fully registered or in coupon bearer form

The bonds underlying some certificates of deposit for bonds belong to an issue that can be issued in either coupon or registered form. On a contract in those certificates, what decides whether the seller may settle in either form?

Whether the buyer named a preferred form before delivery fell due, either form being deliverable until it did

Whether interchanging the two forms carries a charge, either form being deliverable only where it is free

Whether a form was specified at the time of execution, either form being deliverable where none was

Whether the depositary holds the bonds in registered form, either form being deliverable in that case

A seller's certificate of deposit for bonds has been mutilated. Before it can be a good delivery, by whom must it be appropriately authenticated under FINRA Rule 11520(a)?

By the Uniform Practice Code Committee or FINRA staff, acting on the seller's written application

By the trustee, the registrar, the transfer agent or the issuer

By the receiving member or its customer, on accepting the certificate and noting the damage

By a medallion signature guarantor or a notary public acting for the delivering member

A seller of certificates of deposit for bonds is to make delivery at the purchaser's office. What fixes the hours within which the delivery must be made?

The hours established by rule or practice in the community where the seller's office is located

Whichever hours the two members agree when they trade, the Code fixing none of its own

The hours established by rule or practice in the community where the purchaser's office is located

The hours the Uniform Practice Code Committee sets for all deliveries of these certificates, wherever made

Two members agree on every fact of a delivery of certificates of deposit for bonds. They differ only over whether the Uniform Practice Code makes that delivery a good one. May the Uniform Practice Code Committee resolve their question?

No — the Committee interprets the Code in general terms and does not rule on how it applies to a particular delivery

No — a disagreement between two members over one delivery is for arbitration, not for the Committee

Yes, provided the members also dispute the facts of the delivery, since the Committee's role is to find facts

Yes — the Committee may rule on how the Code applies where there is no substantial disagreement as to the facts

FINRA Rule 11364 | Financial Regulation Courses

Units of Delivery — Certificates of Deposit for Bonds

SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES

FINRA Rule 11364 establishes the units of delivery framework for certificates of deposit for bonds through pure cross-reference — the fourth of the security-type-specific units of delivery rules, and the second rule in this dictionary's coverage of the Uniform Practice Code, after FINRA Rule 11160, to operate entirely by incorporating another rule's framework rather than stating an independent standard.

The rule consists of a single sentence: the units of delivery for certificates of deposit for bonds shall be the same as prescribed for bonds in Rule 11362. FINRA Rule 11364 was amended by SR-FINRA-2010-030 effective December 15, 2010 — no prior amendment date is listed on the rule's page, distinguishing it from FINRA Rule 11363's added effective March 18, 1983 designation. One selected notice is associated — Regulatory Notice 10-49.

FINRA Rule 11364 sits within the 11300 Delivery of Securities subsection of the 11000 Uniform Practice Code as the fourth of the security-type-specific units of delivery rules, immediately following FINRA Rule 11363's units of delivery framework for unit investment trust securities and immediately preceding FINRA Rule 11365's framework for securities traded as units or bonds with stock attached.

What Certificates of Deposit for Bonds Are

A certificate of deposit for bonds is an instrument representing a depositary interest in an underlying bond or bonds — rather than holding the bond itself, the holder of a certificate of deposit for bonds holds a certificate evidencing that the underlying bond has been deposited with some depositary arrangement, with the certificate representing the holder's interest in that deposited bond.

This structure is conceptually analogous to other depositary-receipt arrangements found throughout the securities markets — an American Depositary Receipt, for example, represents an interest in an underlying foreign security held by a depositary bank, with the ADR itself being the instrument that trades and is delivered, while the underlying security remains held by the depositary.

Certificates of deposit for bonds historically arose in connection with bond reorganizations, exchange offers, and similar corporate actions where bondholders deposited their existing bonds with a depositary — often a bank or trust company acting pursuant to a deposit agreement — in exchange for certificates representing their deposited interest, pending the completion of whatever reorganization, exchange, or other corporate action the deposit arrangement was designed to facilitate.

The certificate of deposit itself, during the period the underlying bonds remain on deposit, becomes the tradeable instrument — a holder wishing to transfer their interest in the underlying deposited bonds does so by transferring the certificate of deposit, rather than by attempting to transfer an interest in the underlying bonds directly while those bonds remain held by the depositary.

The Cross-Reference to FINRA Rule 11362: Treating the Certificate as the Underlying Bond for Delivery Purposes

FINRA Rule 11364's single operative provision — that units of delivery for certificates of deposit for bonds shall be the same as prescribed for bonds in Rule 11362 — establishes that, for purposes of the Uniform Practice Code's delivery framework, a certificate of deposit for bonds is treated identically to the underlying bond it represents with respect to delivery denominations.

This means the complete FINRA Rule 11362 framework examined in this dictionary's immediately preceding entry — the $1,000/$100 denomination structure for coupon bonds under paragraph (a), the parallel $1,000/$100 structure with its $100,000 ceiling for registered bonds under paragraph (b), the either-form default for bonds issuable in both coupon and registered form under paragraph (c), and the by-agreement fallback for non-$100-multiple principal amounts under paragraph (d) — applies in full to certificates of deposit for bonds, exactly as it would apply to the underlying bonds themselves.

This cross-reference approach makes considerable sense given the relationship between a certificate of deposit and its underlying bond. A certificate of deposit for bonds is, from an economic and principal-amount perspective, simply a different documentary wrapper around the same underlying bond interest — the certificate represents a specific principal amount of the underlying bond, denominated in whatever increments the underlying bond itself was denominated in under FINRA Rule 11362's framework.

There would be little sense in establishing an independent denomination framework for certificates of deposit that differed from the framework governing the underlying bonds those certificates represent — doing so would create an artificial mismatch between the certificate's delivery denominations and the underlying bond's own denomination structure, with no apparent benefit and considerable potential for confusion.

The Parallel to FINRA Rule 11160's Cross-Reference Structure

FINRA Rule 11364's pure cross-reference structure invites direct comparison to FINRA Rule 11160's ex liquidating payments framework, examined earlier in this dictionary's coverage of the 11100 subsection. FINRA Rule 11160, recall, establishes no independent ex-date formula of its own, instead incorporating the formulas FINRA Rules 11140 and 11150 establish for stocks and other securities generally, and for flat-traded bonds, respectively, and applying whichever formula corresponds to the underlying security type for purposes of liquidating payments and principal payments.

FINRA Rule 11364 follows precisely the same drafting economy, but in the units-of-delivery context rather than the ex-date context — rather than restating FINRA Rule 11362's denomination framework, FINRA Rule 11364 simply incorporates it by reference for the specific category of certificates of deposit for bonds. And just as this dictionary observed that FINRA Rule 11160's pure cross-reference structure means it automatically incorporates any future amendments to FINRA Rules 11140 and 11150 without itself requiring amendment, the same automatic-incorporation effect applies to FINRA Rule 11364's relationship with FINRA Rule 11362 — any future amendment to FINRA Rule 11362's denomination framework would automatically carry forward into FINRA Rule 11364's application to certificates of deposit for bonds, without FINRA Rule 11364 itself needing to be separately amended.

This recurring pattern — a brief rule that incorporates by reference the framework of another, more elaborately developed rule, applying that framework to a related but distinct category — appears to be a recurring structural technique throughout the Uniform Practice Code wherever a category of security or transaction is sufficiently analogous to another, already-addressed category that an independent framework would be redundant.

FINRA Rule 11364's relationship to FINRA Rule 11362 for certificates of deposit for bonds mirrors FINRA Rule 11160's relationship to FINRA Rules 11140 and 11150 for liquidating payments and principal payments — in both cases, the Code achieves coverage of the additional category through incorporation rather than restatement, maintaining permanent consistency between the incorporating and incorporated provisions without ongoing maintenance burden.

The Absence of a Separately Listed Addition Date

FINRA Rule 11364's amendment history — showing only Amended by SR-FINRA-2010-030 effective December 15, 2010, with no separate Added effective date as FINRA Rule 11363 shows for its March 18, 1983 origin — presents a point worth noting for completeness, though without overstating what can be concluded from it.

FINRA Rule 11363's page explicitly distinguished between Added eff. Mar. 18, 1983 and the subsequent Amended by SR-FINRA-2010-030, confirming a two-stage history — original addition in 1983, followed by the 2010 Consolidated Rulebook transfer amendment. FINRA Rule 11364's page shows only the single Amended by SR-FINRA-2010-030 entry, without any corresponding Added designation or earlier effective date.

This could indicate either that FINRA Rule 11364 was itself added as part of the 2010 Consolidated Rulebook transfer — making the December 15, 2010 effective date simultaneously its addition date and its (only) amendment date — or that an earlier addition date exists but is not displayed on the current FINRA.org page for this particular rule.

Without an explicit Added designation analogous to FINRA Rule 11363's, this dictionary does not assert a specific pre-2010 origin date for FINRA Rule 11364, noting instead that the confirmed amendment history shows only the single December 15, 2010 amendment through SR-FINRA-2010-030.

Connection to FINRA Rules 11160, 11350, 11360, 11362, 11363, and 11365

FINRA Rule 11364 connects directly and substantively to FINRA Rule 11362 — the bond units of delivery framework that FINRA Rule 11364 incorporates in its entirety for certificates of deposit for bonds, including FINRA Rule 11362's $1,000/$100 denomination structures for coupon and registered bonds, its either-form default for bonds issuable in both forms, and its by-agreement fallback for non-$100-multiple principal amounts.

It connects to FINRA Rule 11160 as a structural parallel — both rules achieve coverage of an additional category through pure incorporation by reference of another rule's framework, with automatic future-amendment incorporation as a shared consequence of this drafting approach.

It connects to FINRA Rule 11350's part-delivery framework, which applies to a contract in certificates of deposit for bonds as to any contract due, although FINRA Rule 11362's incorporated framework establishes no odd-lot concept for bonds — bonds, as this dictionary's FINRA Rule 11362 entry discussed, address non-$100-multiple amounts through FINRA Rule 11362(d)'s by-agreement provision rather than a built-in odd-lot framework analogous to FINRA Rule 11361's treatment of stocks. It connects to FINRA Rule 11360 as its parent series marker within the units of delivery cluster. It connects to FINRA Rule 11363 as its immediately preceding rule within the cluster, the two rules' contrasting amendment-history presentations — FINRA Rule 11363's explicit Added designation versus FINRA Rule 11364's absence of one — illustrating the kind of textual variation across individual rule pages that this dictionary's research-first protocol is designed to capture accurately rather than assume away. And it connects to FINRA Rule 11365 — the final rule in the units of delivery cluster, addressing securities traded as units or bonds with stock attached, a category that, given its combination of bond and stock characteristics, may itself draw upon elements of both FINRA Rule 11361's stock framework and FINRA Rule 11362's bond framework that FINRA Rule 11364 incorporates for certificates of deposit.

Worked Scenarios: Delivering Certificates of Deposit in Bond Denominations

Because FINRA Rule 11364 adopts the units of delivery prescribed for bonds in FINRA Rule 11362, a delivery of certificates of deposit for bonds is made up in the bond denominations. For bonds in coupon bearer form, FINRA Rule 11362(a) calls for denominations of $1,000 or denominations of $100 or multiples thereof aggregating $1,000. For fully registered bonds, FINRA Rule 11362(b) allows denominations of $1,000 or multiples thereof, or amounts of $100 or multiples aggregating $1,000, but in no event denominations larger than $100,000.

Suppose Member A sells Member B $1,000 principal amount of certificates of deposit for bonds, and Member A holds a single certificate for $1,000. Member B asks to receive ten certificates of $100 each instead. A $1,000 denomination is one that both paragraphs permit, so Member A may deliver its single certificate. Member B's preference for smaller pieces does not oblige Member A to split it.

Now suppose Member A tenders two certificates instead, one for $250 and one for $750. Together they make $1,000, but neither piece is a $1,000 denomination and neither is $100 or a multiple of $100. The tender does not meet the bond denominations that FINRA Rule 11364 applies, even though its total matches the contract.

The units of delivery govern how a delivery is made up, not how much may be traded. FINRA Rule 11362 speaks of each delivery being made in stated denominations. Two members may contract for $40,000 principal amount of certificates of deposit for bonds; the bond denominations then decide which certificates may make up that $40,000 when it is delivered, for example forty certificates of $1,000.

Certificates of Deposit Representing Registered Bonds

FINRA Rule 11362's framework applies to certificates of deposit for bonds exactly as it would apply to the underlying bonds themselves. Where the deposited bonds are fully registered bonds, FINRA Rule 11362(b) therefore sets the denominations of the certificates delivered.

Suppose a contract calls for $500,000 principal amount of certificates of deposit representing fully registered bonds. The seller may not tender one certificate for the whole $500,000, because no denomination may be larger than $100,000. The limit applies to each certificate delivered, not to the size of the contract, so a $500,000 contract can still be delivered in certificates of $100,000 or less.

Within that limit a single certificate may be larger than $1,000. FINRA Rule 11362(b) permits denominations of $1,000 or multiples thereof, so a $25,000 contract in certificates of deposit representing fully registered bonds may be delivered as one certificate for $25,000.

Some bond issues can be issued in either coupon or registered form. Under FINRA Rule 11362(c), unless otherwise specified at the time of execution, contracts in such bonds are settled by delivery of bonds in either form under the denominations in paragraphs (a) and (b), notwithstanding that there may be a charge for interchanging one form with the other. Applied through FINRA Rule 11364, where the deposited bonds belong to such an issue and the contract specified no form, the seller of the certificates of deposit may settle in either form, using the denominations that apply to the form it delivers.

Odd Principal Amounts, and Principal Rather Than a Count of Certificates

FINRA Rule 11362(d) covers a contract relating to paragraphs (a), (b) and (c) that is for a principal amount which is not a multiple of $100. For such a contract the parties shall agree, at the time of entering into the contract, as to the proper units of delivery. Suppose two members contract for $2,550 principal amount of certificates of deposit for bonds. $2,550 is not a multiple of $100, so the two members must agree the units of delivery when they enter into the contract. Leaving the units to be settled when delivery falls due, or leaving them to the seller's choice, does not meet the rule.

A certificate of deposit for bonds represents a specific principal amount of the underlying bond, and its delivery is measured in that principal amount. It is not counted as a whole unit in the way a unit investment trust security is. FINRA Rule 11363 makes a single unit of the trust the minimum unit of delivery for unit investment trust securities. FINRA Rule 11364 instead adopts the bond denominations, which are stated in dollars of principal. A contract in certificates of deposit for bonds is therefore delivered in principal-amount denominations, however many certificates that takes.

Good Delivery of a Certificate of Deposit Under FINRA Rule 11610(h)

Meeting the bond denominations is not the only test a delivery of certificates of deposit must pass. FINRA Rule 11610(h) provides that certificates of deposit issued by committees or depositaries other than those specified at time of trade shall not be a good delivery. Suppose two members specified, when they traded, certificates of deposit issued by one depositary, and the seller tenders certificates in correct denominations issued by a different depositary. Those certificates are not a good delivery, however well their denominations fit the bond units that FINRA Rule 11364 adopts.

FINRA Rule 11610 attaches a cost to such a failure. Its opening sentence provides that failure of the seller to meet the requirements of good delivery relating to bonds and similar evidences of indebtedness, as set forth in paragraphs (a) through (h) inclusive, shall make the seller liable for any expense incurred as a result of such failure. A buyer that incurs expense because the seller's certificates of deposit were not a good delivery can therefore look to the seller for that expense.

Where two members agree on the facts of a delivery of certificates of deposit and differ only over how the Code applies to it, the Uniform Practice Code Committee may resolve the question. FINRA Rule 11110 gives the Committee power to issue interpretations or rulings with respect to the applicability of the Code to situations in which there is no substantial disagreement as to the facts involved. Where the facts themselves are substantially disputed, that power does not reach the dispute.

Book-Entry or Physical Certificates: FINRA Rule 11310

FINRA Rule 11310(a) requires a member to use the facilities of a securities depository for the book-entry settlement of all transactions in depository eligible securities with another member, and FINRA Rule 11310(f) makes that requirement supersede any inconsistent requirement under other rules in the Code. Depository eligible securities are securities that are part of an issue eligible for deposit at a securities depository and that, for the particular transaction, are eligible for book-entry transfer at the depository at the time of settlement. So where certificates of deposit for bonds are depository eligible and already on deposit at a securities depository, a trade in them between two members settles by book-entry. The seller may not insist on handing over physical certificates instead, however well their denominations would fit the bond units.

FINRA Rule 11310 does not apply to a transaction where the securities to be delivered are not on deposit at a securities depository and the deliverer is unable to deposit them in a depository before the cut-off date the depository has established for that issue. In that case the certificates of deposit are delivered physically, and the certificates handed over must be in the bond denominations that FINRA Rule 11364 adopts.

When a Certificate of Deposit Is Delivered: Regular Way Contracts

FINRA Rule 11320 fixes the delivery date by the type of transaction. For a regular way transaction, delivery shall be made at the office of the purchaser on, but not before, the first business day following the date of the transaction. Where two members trade certificates of deposit for bonds regular way on a Monday and the Tuesday is a business day, delivery is due on the Tuesday.

If, in a regular way contract, the seller tenders delivery before the stated time, acceptance is at the election of the purchaser, and rejection of the delivery by the purchaser is without prejudice to its rights. A purchaser that turns away certificates of deposit tendered on the trade date itself keeps its right to delivery when the contract falls due.

Contracts due on a day other than a business day mature on the next business day. A contract in certificates of deposit for bonds that falls due on a Saturday therefore matures on the Monday that follows, provided that Monday is a business day.

Cash and Option Contracts in Certificates of Deposit

In a transaction for cash, delivery shall be made at the office of the purchaser on the day of the transaction. Certificates of deposit for bonds sold for cash on a Wednesday are delivered that Wednesday.

In a seller's option transaction, delivery is made at the office of the purchaser on the date on which the option expires. The seller may instead deliver on any business day after the first business day following the date of the transaction and before the option expires, provided it delivers written notice of intention to deliver at the office of the purchaser on a business day preceding the day of delivery. A seller of certificates of deposit for bonds on a seller's option that wants to deliver early must therefore give that written notice on a business day before the day it delivers.

In a buyer's option transaction, delivery shall be made at the office of the purchaser on the date on which the option expires. Paragraph (d) contains no early-delivery provision of the seller's-option kind, and under FINRA Rule 11320(g) a tender before the stated time in such a contract may be accepted or rejected at the election of the purchaser.

Delayed Delivery, and the Purchaser's Office and Hours

In a transaction made for delayed delivery, delivery shall be at the office of the purchaser on the date agreed upon at the time of the transaction. Two members that trade certificates of deposit for bonds for delayed delivery fix the delivery date when they trade.

If the purchaser maintains more than one office, delivery shall be made at the office with which the transaction was effected, unless delivery instructions are provided at the time of the transaction. Suppose a purchasing member's Boston office effects a trade in certificates of deposit for bonds and gives no delivery instructions at the time of the trade, and the next day the purchaser asks for delivery at its Chicago office. Delivery is still due at the Boston office, because instructions given after the trade do not move it.

Delivery shall be made at the office of the purchaser between the hours established by rule or practice in the community where that office is located.

Paying for and Confirming a Certificate of Deposit Trade

The party making delivery has the right to require the purchase money to be paid upon delivery by certified check, cashier's check, bank draft or cash. A member delivering certificates of deposit for bonds that is offered the purchaser's own uncertified company check may insist instead on one of those four forms.

For a trade in certificates of deposit for bonds that does not clear through the National Securities Clearing Corporation or another clearing organization registered under the Exchange Act, each party to the transaction shall send a Uniform Comparison or Confirmation by the end of the day on the trade date.

Comparisons or confirmations shall be compared upon receipt to ascertain whether any discrepancies exist. If one party's confirmation of a certificate of deposit trade states a different principal amount from the other's, a corrected Uniform Comparison or Confirmation shall be sent by the party in error.

One Comparison for Each Transaction, and the CUSIP Number

A properly executed Uniform Comparison or Confirmation must be used for each transaction. Where two members make two separate trades in the same certificates of deposit for bonds on the same day, each trade has its own Uniform Comparison or Confirmation; one document does not serve for both.

The CUSIP number must be used on the Uniform Transfer Instruction Form, the Uniform Delivery Ticket and the Uniform Comparison or Confirmation. Those forms, when used for a trade in certificates of deposit for bonds, carry the CUSIP number.

When a Delivery of Certificates of Deposit Fails or Falls Short

In trades between members, failure to deliver the securities sold on or after the settlement date does not effect a cancellation of the contract. If a seller of certificates of deposit for bonds fails to deliver them when due, the contract stands, and the buyer's remedy is provided for by FINRA Rule 11810 unless the two parties mutually consent to cancel the trade.

In every such case of nondelivery, the party in default is liable for any damages which may accrue, and all claims for such damages shall be made promptly. A buyer that suffers damages because certificates of deposit for bonds were not delivered should therefore make its claim promptly.

FINRA Rule 11350 requires the purchaser to accept a part delivery on any contract due, provided the portion remaining undelivered is not an amount which includes an odd-lot which was not a part of the original transaction. The requirement is written for any contract due, not only for contracts in stock, so it reaches a contract in certificates of deposit for bonds. A purchaser may not refuse a part delivery of such certificates merely because the securities are not shares of stock.

Which Transactions FINRA Rule 11364 Reaches

The Uniform Practice Code governs over-the-counter secondary market transactions in securities between members, except, among others, transactions between members which are compared, cleared or settled through the facilities of a registered clearing agency, except to the extent that the rules of the clearing agency provide that rules of other organizations shall apply. A trade in certificates of deposit for bonds settled through a registered clearing agency whose rules do not call in the rules of other organizations is therefore outside the Code, and FINRA Rule 11364 does not govern its delivery.

The Code's coverage may be expanded or limited in any rule of the Code only if the rule specifically so provides. FINRA Rule 11364's single sentence makes no such provision, so its units of delivery apply to transactions between members within the Code, not to a member's delivery of certificates of deposit for bonds to a customer that is not a member.

Certificates of Deposit Traded Alongside Other Securities

Certificates of deposit for bonds may be held alongside other securities, such as warrants. FINRA Rule 11365, a Ruling of the Committee, provides that where securities are physically separate instruments, transferable independently of one another, and not subject to any legal or technical condition which requires that they be kept together, good practice requires that they be quoted and dealt in separately and not as units. So where certificates of deposit for bonds and warrants meet those conditions, good practice is to quote and deal in each separately, and the certificates of deposit are then delivered in the bond units that FINRA Rule 11364 adopts.

A Damaged Certificate of Deposit

FINRA Rule 11520(a) provides that a mutilated security shall not be a good delivery until appropriately authenticated by the trustee, registrar, transfer agent, or issuer.

Suppose a seller's certificate of deposit for bonds is mutilated. Until it is appropriately authenticated by the trustee, registrar, transfer agent or issuer, it is not a good delivery.

Written Notice of Intention to Deliver

In a seller's option transaction, FINRA Rule 11320(c) allows the seller to deliver on any business day after the first business day following the date of the transaction and before the option expires, provided the seller delivers at the office of the purchaser, on a business day preceding the day of delivery, written notice of intention to deliver. FINRA Rule 11120(h) provides that the term written notice, as used in the Code, shall include a notice delivered by hand, letter, facsimile transmission, electronic mail or other comparable media.

Suppose a member sold certificates of deposit for bonds on a seller's option, and it wants to deliver on a Thursday, a business day that falls before the option expires and after the first business day following the trade. On the Tuesday, a business day, it sends an electronic mail to the purchaser's office stating its intention to deliver. That electronic mail is written notice in the Code's sense. The seller does not also need to send a letter or deliver a paper notice by hand.

Buying In Certificates of Deposit

Where, in a trade between members, a seller fails to deliver certificates of deposit for bonds, the buyer's remedy is provided for by FINRA Rule 11810, unless the parties mutually consent to cancel the trade. That rule does not apply where the contract is subject to the buy-in requirements of a national securities exchange or a registered clearing agency. Each example below is a contract between members that is not subject to such requirements.

On failure of the seller to deliver in accordance with the buy-in notice, the buyer may close the contract by purchasing all or part of the securities necessary to satisfy the amount requested in the notice. Securities the seller delivers after it receives the buy-in notice are considered as delivered pursuant to that notice. Suppose a buyer's notice of buy-in covers $50,000 principal amount of certificates of deposit for bonds. After receiving the notice, the seller delivers $20,000 principal amount, which the buyer accepts. The seller delivers nothing more by the time the notice states. The $20,000 counts as delivered pursuant to the notice, so the securities still necessary to satisfy the amount requested are the remaining $30,000 principal amount, and the buyer may buy in all or part of that $30,000.

A buy-in notice can pass along a chain of members. FINRA Rule 11810(b)(5) provides that notice shall be redelivered immediately by the receiving party to other parties from which the securities involved are due, in the form of a re-transmitted notice. When the buyer executes the buy-in against the seller, that execution also closes out all the contracts covered by re-transmitted notices issued under the original notice. There is one exception. If a member sends a re-transmitted notice before the buy-in is executed, but the recipient does not receive it until after the execution, the member that sent it may, unless otherwise agreed, promptly re-establish the contract to which the notice related by a new sale. Suppose Member A bought certificates of deposit for bonds from Member B, and Member B is owed the same certificates by Member C. Member A gives Member B notice of buy-in. Member B sends Member C a re-transmitted notice before the buy-in is executed, but Member C receives it only after Member A has executed the buy-in against Member B. Unless the members have agreed otherwise, Member B may promptly re-establish its contract with Member C by a new sale.

The party that executes a buy-in must notify the party for whose account the securities were bought of the quantity purchased and the price paid. It must do so immediately upon execution, and no later than 6:00 p.m. ET on the date of execution. The notification must be in written or electronic form having immediate receipt capabilities. If that media is not available, the telephone must be used for the purpose of same-day notification. Written or similar electronic notification having next-day receipt capabilities must then be sent at the same time as the call. In either case, formal confirmation of the purchase goes to the party entitled to it no later than 9:30 a.m. ET on the business day after the buy-in is executed. Suppose a buyer executes a buy-in of certificates of deposit for bonds at 2:00 p.m. ET, and that afternoon it has no written or electronic media with immediate receipt capabilities. It telephones the seller immediately, before 6:00 p.m. ET that day, with the quantity bought and the price paid. At the same time, it sends written or similar electronic notification having next-day receipt capabilities. It then forwards formal confirmation by 9:30 a.m. ET on the following business day.

Notice of an executed buy-in also goes down the chain. Notification of the execution of a buy-in shall be given, using the same procedures, to the succeeding parties to which a re-transmitted notice was issued. So where a buy-in of certificates of deposit for bonds was preceded by re-transmitted notices, the members that received them are also notified of the execution. That notification follows the same procedures as the notice to the party for whose account the certificates were bought.

Certificates of Deposit Subject to an Exchange Offer: The Liability Notice

FINRA Rule 11810(j)(1)(A) provides an alternative to a buy-in for certain securities. Among the contracts it covers is a contract for warrants, rights, convertible securities or other securities that are the subject of a tender or exchange offer, where the last day on which the securities must be delivered or surrendered (the expiration date) is the settlement date of the contract or later. In that case the receiving member may deliver a Liability Notice to the delivering member, as an alternative to the close-out procedures in paragraphs (b) through (h). Suppose an exchange offer is made for certificates of deposit for bonds, and the last day for surrendering them under the offer falls after the settlement date of a contract between two members in those certificates, and the contract is not subject to the buy-in requirements of a national securities exchange or a registered clearing agency. The receiving member may deliver a Liability Notice to the delivering member instead of using the buy-in procedure.

How the Liability Notice is sent depends on the two members. When both parties to the contract are participants in a registered clearing agency that has an automated service for notifying a failing party of the liability attendant to a failure to deliver, the Liability Notice must be transmitted through that automated notification service. So where both members to such a contract in certificates of deposit for bonds participate in such a clearing agency, the receiving member must send its Liability Notice through that service.

When the two parties are not both participants in such a clearing agency, the notice must be issued using written or comparable electronic media having immediate receipt capabilities. To obtain the protection FINRA Rule 11810 provides, it must be sent as soon as practicable, and no later than two hours before the cutoff time set out in the instructions on the specific offer or other event. Suppose the instructions on an exchange offer for certificates of deposit for bonds set a cutoff of 5:00 p.m. on the offer's last day. To obtain that protection, a receiving member whose counterparty is not a fellow participant in such a clearing agency must send its notice by such media as soon as practicable, and no later than 3:00 p.m. that day.

In all cases, members must be prepared to document requests for which a Liability Notice is initiated. A receiving member that initiates a Liability Notice on certificates of deposit for bonds must therefore be ready to document that request.

Delivering the Units Agreed for an Odd Principal Amount

FINRA Rule 11364 applies to certificates of deposit for bonds the units of delivery prescribed for bonds in FINRA Rule 11362. Under FINRA Rule 11362(d), when a contract relating to paragraphs (a), (b) and (c) is for a principal amount which is not a multiple of $100, the parties shall agree, at the time of entering into the contract, as to the proper units of delivery.

Suppose two members contract for $2,550 principal amount of certificates of deposit for bonds. When they enter into the contract, they agree that delivery will be made in two certificates of $1,000 each and one certificate of $550. When delivery falls due, the seller tenders exactly those three certificates. Those are the units the parties agreed at the time of entering into the contract, so they are the proper units of delivery for that contract, and the seller's tender is made in them.

Certificates of Deposit Bought for Cash: A Buy-In Without Notice

In a transaction for cash, delivery shall be made at the office of the purchaser on the day of the transaction. FINRA Rule 11810(k) provides that contracts made for cash may be bought in without notice during the normal trading hours on the day following the date delivery is due on the contract. It adds that in all cases, notification of an executed buy-in must be provided pursuant to FINRA Rule 11810(h). Under paragraph (h), the party executing the buy-in notifies the party for whose account the securities were bought of the quantity purchased and the price paid.

Suppose Member A buys certificates of deposit for bonds from Member B for cash on a Wednesday, and Member B delivers nothing that day. The trade is compared and settled directly between the two members, the contract is not subject to the buy-in requirements of a national securities exchange or a registered clearing agency, and it is not otherwise excluded from FINRA Rule 11810 by paragraph (a) of that rule. Delivery was due on the Wednesday, so Member A may buy the certificates in without notice during normal trading hours on the Thursday. Buying in without notice does not remove the notification that follows the buy-in. Once it has executed the buy-in, Member A must notify Member B of the quantity purchased and the price paid, as FINRA Rule 11810(h) provides.

Liability Notices: The Expiration Date and a Protect Period

Whether a receiving member may deliver a Liability Notice on a contract for securities that are the subject of a tender or exchange offer depends in part on the expiration date. FINRA Rule 11810(j)(1)(A) makes the Liability Notice available where the last day on which the securities must be delivered or surrendered (the expiration date) is the settlement date of the contract or later. FINRA Rule 11810(j)(3) defines the expiration date as the latest time and date on which securities must be delivered or surrendered, up to and including the last day of the protect period, if any.

Suppose an exchange offer is made for certificates of deposit for bonds. The last day for surrendering them under the offer is a Monday, and the offer provides a protect period whose last day is the Thursday of the same week. Two members have a contract in those certificates with a settlement date of the Tuesday. The trade is compared and settled directly between them, the contract is not subject to the buy-in requirements of a national securities exchange or a registered clearing agency, and it is not otherwise excluded from FINRA Rule 11810 by paragraph (a) of that rule. The expiration date runs up to and including the last day of the protect period, so it is the Thursday. That is later than the Tuesday settlement date, so the receiving member may deliver a Liability Notice to the delivering member. Had the offer provided no protect period, the expiration date would have been the Monday, before the settlement date, and the condition in FINRA Rule 11810(j)(1)(A) would not have been met.

The condition is met when the expiration date falls on the settlement date itself, because FINRA Rule 11810(j)(1)(A) asks only that the expiration date be the settlement date of the contract or later.

Liability Notices: When the Delivering Member Fails to Deliver

FINRA Rule 11810(j)(2) provides that if the delivering member fails to deliver the securities on the expiration date, the delivering member shall be liable for any damages which may accrue thereby. A Liability Notice delivered in accordance with the provisions of FINRA Rule 11810 serves as notification by the receiving member of the existence of a claim for damages, and all claims for such damages shall be made promptly.

Suppose a receiving member delivered a Liability Notice, in accordance with FINRA Rule 11810, on a contract in certificates of deposit for bonds that are the subject of an exchange offer. The delivering member fails to deliver the certificates on the expiration date, and damages accrue to the receiving member as a result. The delivering member is liable for those damages. It cannot answer the claim by saying that the receiving member sent it only a Liability Notice and never told it of a claim, because the Liability Notice itself served as notification of the existence of a claim for damages.

Examination Relevance and Key Takeaways

FINRA Rule 11364 is tested on the Series 7 and Series 24 examinations as the units of delivery framework for certificates of deposit for bonds — a brief cross-reference provision that incorporates FINRA Rule 11362's bond denomination framework in its entirety.

The key points to retain are these: FINRA Rule 11364 provides that the units of delivery for certificates of deposit for bonds shall be the same as prescribed for bonds in FINRA Rule 11362 — meaning the complete FINRA Rule 11362 framework, including its $1,000/$100 denomination structures for coupon and registered bonds with the $100,000 ceiling on registered bond denominations, its either-form default for bonds issuable in both coupon and registered form, and its by-agreement fallback for non-$100-multiple principal amounts, applies in full to certificates of deposit for bonds.

A certificate of deposit for bonds represents a depositary interest in an underlying bond held by a depositary arrangement, historically arising in connection with bond reorganizations and exchange offers, with the certificate functioning as the tradeable instrument while the underlying bonds remain on deposit; FINRA Rule 11364's pure cross-reference structure parallels FINRA Rule 11160's incorporation of FINRA Rules 11140 and 11150 for ex liquidating payments — both rules achieve coverage of an additional category through incorporation by reference rather than independent restatement, with automatic incorporation of any future amendments to the referenced rule; and the rule's confirmed amendment history shows only Amended by SR-FINRA-2010-030 effective December 15, 2010, with no separately listed addition date, and one selected notice — 10-49.