Trade Settlement is the process of transferring securities to a buyer’s account and cash to a seller’s account. Trade settlement is a two-way process in the final transaction stage relating to trading stocks, bonds, futures, or other financial assets.
The transaction date is the date on which the official deal takes place. Transferring of the absolute ownership takes place on the settlement date. The transaction date never changes, represented with the letter ‘T’ while the settlement date is generally ‘T+2’.
The market regulators have decided to set a date for the transaction’s completion. Setting this specified date reduces the risk of any delay in the transaction. The settlement period provides the time necessary for clearing agents to ensure the orderly transfer of shares and cash.
There are two broad categories of Trade settlements:
The vital settlement types are as follows:
Let us take a look at how trades in different segments are settled:
Dematerialised Mode: The NSE Clearing follows a T+2 rolling settlement cycle. NSE Clearing determines the cumulative obligations of each member on the T+1 day, and the data is electronically transferred to the Clearing Members. All trades concluded during trading are settled on a designated settlement day (T+2 day).
In case of short deliveries on the T+2 day in the regular segment, NSE Clearing has to conduct a buy-in auction on the settlement day, and the settlement for the same is completed on the T+3 day. On the other hand, there is a direct closeout in the limited physical market segment.
For arriving at the settlement day, all intervening holidays, including bank holidays, NSE holidays, Saturdays, and Sundays, are excluded from consideration. The settlement schedule for all the settlement types is communicated to the market participants widely through the circular issued during the previous month.
Pay-in is the day when the buyer sends the funds to the stock exchange, and the seller sends the securities in return. Pay-out is when the stock exchange delivers the funds to the seller and the shares purchased to the buyer.
A bad delivery is when shares transfer is not completed because of the lack of compliance with the exchange norms. The transaction is not fulfilled, abiding by every prospect.
A rolling settlement is where the settlement is made in the successive days of the trade. In the rolling settlement, deals are settled by the second working day. The period excludes Saturday and Sunday, bank holidays, and exchange holidays. The settlement day is the day when you become the shareholder of record.
The Settlement Day is significant for those whose interests pertain to earning dividends.
Rolling settlement rules in BSE:
The stock must settle down to exhibit transfer of ownership. The settlement date for trade must be no later than the dividend record date. Since it takes three days for the stock to settle, buyers who want the dividend must purchase the stock no later than three days before the record date, when the stock is still selling, or with a dividend. Shares purchased on or after the ex-dividend date don’t usually receive the current dividend.
The cycle for rolling settlements on the National Stock Exchange (NSE) :
Activity | Working Days |
Rolling Settlement Trading | T |
Clearing Including Custodial Confirmation And Delivery Generation | T+1 |
Settlement Through Securities And Funds Pay-In And Pay-Out | T+2 |
Post Settlement Auction | T+2 |
Auction Settlement | T+3 |
Reporting For Bad Deliveries | T+4 |
Pay-In-Pay-Out Of Rectified Bad Deliveries | T+6 |
Re-Reporting Of Bad Deliveries | T+8 |
Closing Of Re-Bad Deliveries | T+9 |
The Settlement usually occurs two business days after the order is executed or T+2 (trade date plus two days).
Settlement is the actual exchange of money, or some other value, for the securities. Clearing is the process of updating the accounts of the trading parties and arranging for the transfer of cash and securities.
If you have bought the stock or security using settled cash, you can sell it at any time. The trade for settled cash securities is possible. But if you buy a stock with unsettled funds, selling it before the funds used to purchase have settled is a violation of Regulation (good faith violation)
Settlement refers to the delivery of stock against the total payment that must take place within three business days after the trade. You can sell the purchased stock before the settlement — day traders do it all the time — keeping in mind that you do not violate the free ride rule.
If you incur three good faith violations in 12 months in a cash account by chance, your brokerage firm will restrict your account. Thus, you will only buy securities if you have sufficient settled cash in the account before placing a trade.
Selling for unsettled funds before the funds used to purchase have been settled is a violation of Regulation (good faith violation)
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