Settlement (finance)

Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against (in simultaneous exchange for) payment of money, to fulfill contractual obligations, such as those arising under securities trades.

In the United States, the settlement date for marketable stocks is usually 3 business days or T+3 after the trade is executed, and for listed options and government securities it is usually 1 day after the execution. In Europe, settlement date has recently been adopted as 2 business days settlement cycles T+2.

As part of performance on the delivery obligations entailed by the trade, settlement involves the delivery of securities and the corresponding payment.

A number of risks arise for the parties during the settlement interval, which are managed by the process of clearing, which follows trading and precedes settlement. Clearing involves modifying those contractual obligations so as to facilitate settlement, often by netting and novation.

Settlement involves the delivery of securities from one party to another. Delivery usually takes place against payment known as delivery versus payment, but some deliveries are made without a corresponding payment (sometimes referred to as a free delivery). Examples of a delivery without payment are the delivery of securities collateral against a loan of securities, and a delivery made pursuant to a margin call.

Prior to modern financial market technologies and methods such as depositories and securities held in electronic form, securities settlement involved the physical movement of paper instruments, or certificates and transfer forms. Payment was usually made by paper check upon receipt by the or transfer agent of properly negotiated certificates and other requisite documents. Physical settlement securities still exist in modern markets today mostly for private (restricted or unregistered) securities as opposed to those of publicly (exchange) traded securities; however, payment of money today is typically made via electronic funds transfer (in the U.S., a bank wire transfer made through the Federal Reserve's Fedwire system). Physical/paper settlement involves higher risks, inasmuch as paper instruments, certificates, and transfer forms are subject to risks electronic media are not, such as loss, theft, clerical errors, and forgery (see indirect holding system).

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