The settlement date is the date when a trade is final, and the buyer must make payment to the seller while the seller delivers the assets to the buyer. As of May 28, 2024, the settlement date for stocks is one business day after the execution date (T+1). It's the same for government securities and options. In spot foreign exchange (FX), the date is two business days after the transaction date (T+2). Options contracts and other derivatives also have settlement dates for trades in addition to a contract's expiration dates.
Settlement date may also refer to the payment date of benefits from a life insurance policy.
Key Takeaways
- The settlement date is the date on which a trade is final—when the buyer pays the seller and the seller delivers cleared assets to the buyer.
- The settlement arose to deal with the complex process of clearing a transaction but has since been reduced to as little as one business days (T+1) through the use of technology.
- It is the settlement date, and not the trade date, that denotes the legal transfer of ownership of an asset.
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Understanding Settlement Dates
The financial market specifies the number of business days after a transaction thata security or financial instrument must be paid and delivered. This lag between transaction and settlement dates follows how settlements were previously confirmed, by physical delivery. In the past, security transactions were done manually rather than electronically. Investors would have to wait for the delivery of a particular security, which was in actual certificate form and would not pay until reception. Since delivery times could vary and prices could fluctuate, market regulators set a period of time in which securities and cash must be delivered.
The settlement date, not the trade date, establishes a legal transfer of ownership from the seller to the buyer.
Today, using modern technology, a transaction is electronically processed in less time. Most stocks and bonds settle one business day after the transaction date, per a rule by the U.S. Securities and Exchange Commission (SEC) that took effect May 28, 2024. This window, known as T+1, was previouslyT+2, meaning it took two business days to settle a transaction.
Government bills, bonds, and options settle the next business day. Spot foreign exchange transactions usually settle two business days after the execution date. A primary exception is the U.S. dollar vs. the Canadian dollar, which settles the next business day.
Weekends and holidays can cause the time between transaction and settlement dates to increase substantially, especially during holiday seasons (e.g., Christmas, Easter, etc.). Foreign exchange market practice requires that the settlement date be a valid business day in both countries.
T+5
Historically, a stock trade could take as many as five business days (T+5) to settle a trade. With technological advances, this was reduced first to T+3, then T+2, and now T+1.
Forward foreign exchange transactions settle on any business day that is beyond 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 exposes transacting parties to credit risk. Credit risk is especially significant in forward foreign exchange transactions, dueto the length of time that can pass and the volatility in the market. There is also settlement risk because 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 unless the policy has already been surrendered or cashed out. If there is a single beneficiary, payment is usually within two weeks from the date the insurer receives a death certificate. Payment to multiple beneficiaries can take longer due to delays in contact and general processing.Most states require the insurer pay interest if there is a significant delay in settling the policy.
