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 U.S., the settlement date for marketable stocks is usually 3 business days after the trade is executed, and for listed options and government securities it is usually 1 day after the execution.
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.
| Instrument | Days to Settle in US |
|---|---|
| Stocks | 3 (3 days after trade date or "T + 3") |
| Money Market Mutual Fund | Typically 1 ("T + 1" or "next day"), though can be 0 ("same day") |
| Options | 1 |
Electronic settlement
The electronic settlement system came about largely as a result of Clearance and Settlement Systems in the World's Securities Markets, a major report in 1989 by the Washington-based think tank, the Group of Thirty. This report made nine recommendations with a view to achieving more efficient settlement. This was followed up in 2003 with a report, Clearing and Settlement: A Plan of Action, with 20 recommendations.
In an electronic settlement system, electronic settlement takes place between participants. If a non-participant wishes to settle its interests, it must do so through a participant acting as a custodian. The interests of participants are recorded by credit entries in securities accounts maintained in their names by the operator of the system. It permits both quick and efficient settlement by removing the need for paperwork, and the simultaneous delivery of securities with the payment of a corresponding cash sum (called delivery versus payment, or DVP) in the agreed upon currency.
