Settlement Period
What Is the Settlement Period?
In the securities industry, the trade settlement period alludes to the time between the trade date — month, day, and year that an order is executed in the market — and the settlement date — when a trade is viewed as last. At the point when shares of stock, or other securities, are bought or sold, both buyer and seller must satisfy their obligations to complete the transaction. During the settlement period, the buyer must pay for the shares, and the seller must deliver the shares. On the last day of the settlement period, the buyer turns into the holder of record of the security.
Understanding Settlement Periods
In 1975, Congress enacted Section 17A of the Securities Exchange Act of 1934, which directed the Securities and Exchange Commission (SEC) to establish a national clearance and settlement system to facilitate securities transactions. Thus, the SEC created rules to oversee the most common way of trading securities, which incorporated the concept of a trade settlement cycle. The SEC likewise determined the actual length of the settlement period. Initially, the settlement period gave both buyer and seller the time to do what was fundamental — which used to mean hand-delivering stock certificates or money to the respective broker — to satisfy their part of the trade.
Today, money is transferred instantly but the settlement period stays set up — both as a rule and as a convenience for traders, brokers, and investors. Presently, most online brokers expect traders to have sufficient assets in their accounts before buying stock. Additionally, the industry no longer issues paper stock certificates to represent ownership. Although a few stock certificates still exist from the past, securities transactions today are recorded almost solely electronically utilizing an interaction known as book-entry; and electronic trades are backed up by account statements.
Settlement Period — The Details
The specific length of the settlement period has changed over the long haul. For a long time, the trade settlement period was five days. Then in 1993, the SEC changed the settlement period for most securities transactions from five to three business days — which is known as T+3. Under the T+3 regulation, on the off chance that you sold shares of stock Monday, the transaction would settle Thursday. The three-day settlement period seemed OK when cash, checks, physical stock certificates still were exchanged through the U.S. postal system.
New SEC Settlement Mandate — T+2
In the digital age, in any case, that three-day period appears to be superfluously long. In March 2017, the SEC shortened the settlement period from T+3 to T+2 days. The SEC's new rule amendment reflects improvements in technology, increased trading volumes and changes in investment products and the trading scene. Presently, most securities transactions settle within two business days of their trade date. Thus, assuming you sell shares of stock Monday, the transaction would settle Wednesday. In addition to being more lined up with current transaction speeds, T+2 could reduce credit and market risk, remembering the risk of default for the part of a trading counterparty.
Real World Example of Representative Settlement Dates
Listed below as a representative sample are the SEC's T+2 settlement dates for a number of securities. Consult your broker on the off chance that you have questions about whether the T+2 settlement cycle covers a particular transaction. In the event that you have a margin account you likewise ought to consult your broker to perceive what the new settlement cycle might mean for your margin agreement.
T-2 settlement dates for:
- Certificates of deposit (CDs): Same day
- Business paper: Same day
- U.S. equities: Two business days
- Corporate bonds: Two business days
- City bonds: Two business days
- Government securities: Next business day
- Options: Next business day
- Spot foreign exchange (FX): Two business days
Highlights
- In March 2017, the SEC issued another mandate that shortened the trade settlement period.
- The settlement period is the time between the trade date and the settlement date.
- The SEC created rules to administer the trading system, which incorporates outlines for the settlement date.
