Post-Trade Processing
What Is Post-Trade Processing?
Post-trade processing happens after a trade is complete. At this point, the buyer and the seller compare trade details, support the transaction, change records of ownership, and set up for the transfer of securities and cash. Post-trade processing is particularly important in markets that are not standardized, like the over-the-counter (OTC) markets.
How Post-Trade Processing Works
Post-trade processing is important in that it checks the details of a transaction. Markets and prices move fast; transactions are executed rapidly, often instantaneously. Numerous securities trades are finished over the telephone; the ability for mistakes is inherent, despite traders' expertise. Progressively trades are executed at high frequency by computers as it were. The chance for small mistakes to compound remaining parts high.
Post-trade processing permits the buyer and seller of securities to root out and rectify these errors. In addition to matching the details of the buy and sell orders, post-trade processing incorporates shifting records of ownership and authorizing payment.
Trade Clearing and Settlement
After a trade is executed, the transaction enters what is known as the settlement period. During settlement, the buyer must make payment for the securities they purchased while the seller must deliver the security that was acquired. Contingent upon the type of security, settlement dates will shift. To act as an illustration of how settlement dates work, let's say that an investor buys shares of Amazon (AMZN) on Monday, Jan. 28, 2019. The broker will debit the investor's account for the total cost of the order immediately after its filled, but the status as a shareholder of Amazon won't be settled in the organization's record books for the investor until Wednesday, Jan. 30. At that time, the investor would turn into a shareholder of record.
When the trade has settled, and the funds in any sale of stock or another type of security have been credited to your account, the investor might decide to withdraw the funds, reinvest in new security or hold the amount in cash within the account. For those hoping to cash out a portion of the profits (or what's left from a loss), check to check whether your broker offers transfers to your bank account utilizing the Automated Clearing House (ACH) or by utilizing a wire transfer.
T+2
The settlement period for post-trade processing of stocks and several other exchange-traded assets. In March 2017, the SEC shortened the settlement period from T+3 to T+2 days to reflect improvements in technology, increased trading volumes and changes in investment products and the trading scene.
Clearing is the method involved with accommodating purchases and sales of various options, futures, or securities, as well as the direct transfer of funds starting with one financial institution then onto the next. The cycle validates the availability of the appropriate funds, records the transfer, and on account of securities guarantees the delivery of the security to the buyer. Non-cleared trades can result in settlement risk, and on the off chance that trades don't clear accounting errors will emerge where real money can be lost.
A out trade is a trade that cannot be placed in light of the fact that it was received by a exchange with conflicting information. The associated clearinghouse cannot settle the trade in light of the fact that the data submitted by parties on both sides of the transaction is inconsistent or contradictory.
Instances of Post-Trade Processing
On the NYSE Bonds Platform, following trade completions, all Depository Trust and Clearing Corporation (DTCC)/National Securities Clearing Corporation (NSCC) Regional Interface Organization (RIO) eligible bond trades are sent to NSCC to match trade details of both buyers and respective sellers. Details are transmitted through the RIO.
Post-trade services have recently come to the forefront as a means for financial firms to differentiate their revenue streams. Due to a combination of new regulations, the standardization of derivatives, and increased need for more complex processing measures, due to the growth of alternative assets, post-trade services are an area wherein an organizations get an opportunity to outstrip competitors.
Highlights
- Post-trade processing will ordinarily incorporate a settlement period and include a clearing interaction.
- OTC trades that don't depend on centralized clearinghouses should settle their own trades, which uncovered counterparty risk and settlement risk.
- At this point, the buyer and the seller compare trade details, endorse the transaction, change records of ownership, and set up for the transfer of securities and cash.
- Post-trade processing happens after a trade is complete.
FAQ
What Kinds of Securities Currently Clear T+2? T+1?
Most stocks, ETFs, corporate bonds, municipal bonds, and spot FX trades settle T+2. Listed options and government securities clear T+1. Certificates of deposit (CDs) and commercial paper settle T+0.
Could it be said that anything is Being Done to Shorten Post-Trade Processing?
Indeed. In Spring of 2022, the SEC announced another proposal to shorten the clearing time for most stock trades to T+1 and solicit comment on further shortening it to same-day settlement, or T+0. Whenever approved, the proposal anticipates an effective date around Q1 2024.
For what reason Does the Trade Date Differ From the Settlement Date for Stocks?
On the off chance that you buy or sell shares of stock or other securities, the settlement date will often be between one and three days after the actual trade date. This is on the grounds that it takes time for the post-trade processing, clearing, and settlement of the trade. Quite a bit of this has to do with more seasoned systems still in place to accommodate asset ownership and payment between exchanges, clearing firms, and brokerages.
