Settlement Date

What Is a Settlement Date?

The settlement date is the date when a trade is conclusive, and the buyer must make payment to the seller while the seller conveys the assets to the buyer. The settlement date for stocks and bonds is typically two business days after the execution date (T+2). For government securities and options, it's the next business day (T+1). In spot foreign exchange (FX), the date is two business days after the transaction date. Options contracts and other derivatives likewise have settlement dates for trades in addition to a contract's expiration dates.

Settlement date may likewise allude to the payment date of benefits from a life insurance policy.

The settlement date, not the trade date, establishes a legal transfer of ownership from the seller to the buyer.

Understanding Settlement Dates

The financial market indicates the number of business days after a transaction that a security or financial instrument must be paid and delivered. This lag between transaction and settlement dates follows how settlements were recently confirmed, by physical delivery. In the past, security transactions were done physically rather than electronically. Investors would need to wait for the delivery of a particular security, which was in actual certificate form and wouldn't pay until reception. Since delivery times could differ and prices could fluctuate, market regulators set a period of time in which securities and cash must be delivered.

Today, utilizing modern technology, a transaction is electronically handled quicker than expected.

Most stocks and bonds settle within two business days after the transaction date. This two-day window is known as the T+2. Government bills, bonds, and options settle the next business day. Spot foreign exchange transactions as a rule settle two business days after the execution date. A primary exception is the U.S. dollar versus the Canadian dollar, which settles the next business day.

T+5

Historically, a stock trade could take upwards of five business days (T+5) to settle a trade. With the advent of technology, this has been diminished first to T=3 and presently to just T+2.

Ends of the week and holidays can cause the time between transaction and settlement dates to increase substantially, particularly during holiday seasons (e.g., Christmas, Easter, etc.). Foreign exchange market practice expects that the settlement date be a legitimate business day in both countries.

Forward foreign exchange transactions settle on any business day that is past the spot value date. There is no absolute limit in the market to restrict how far in the future a forward exchange transaction can settle, but credit lines are often limited to one year.

Settlement Date Risks

The elapsed time between the transaction and settlement dates opens transacting parties to credit risk. Credit risk is particularly significant in forward foreign exchange transactions, due to the length of time that can elapse and the volatility in the market. There is likewise settlement risk on the grounds that the currencies are not paid and received simultaneously. Furthermore, time zone differences increase that risk.

Life Insurance Settlement Date

Life insurance is paid following the death of the insured except if the policy has proactively been given up or cashed out. In the event that there is a single beneficiary, payment is as a rule within about fourteen days from the date the insurer gets a death certificate. Payment to multiple beneficiaries can take longer due to defers in contact and general processing. Most states require the insurer pay interest in the event that there is a significant defer in settling the policy.

Highlights

• It is the settlement date, and not the trade date, that denotes the legal transfer of ownership of an asset.
• The settlement date is the date on which a trade is conclusive, when the buyer pays the seller and the seller conveys cleared assets to the buyer.
• The settlement emerged to deal with the complex course of clearing a transaction but has since been decreased to just two business days (T+2) through the utilization of technology.