What is Trade Settlement?

Explain Trade Settlement Meaning

Trade settlement is a two-way process wherein the purchased securities are delivered to the buyer, and the seller receives cash. As you buy or sell financial securities, the actual transfer of ownership occurs on the settlement date.

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Trade Settlement

Once the trade settles, you can claim ownership of your purchased shares or receive the payment. The settlement date is crucial from the perspective of dividend-seeking investors. You would be entitled to receive dividends only if the settlement occurs before the company's record date for allocating dividends.

What is the Settlement Date?

The date on which your trade settles is called the settlement date or the date of trade settlement payment. The transaction date is denoted by "T", and the settlement date typically takes "T+2" days. A trade settlement date ensures no delay in executing the transaction. The settlement period ensures the clearing agents get sufficient time to ensure the proper transfer of shares and cash.

What is Settlement in Stock Market and the Different Types?

There are types of settlement in stock market. Settlement is the final stage related to a trade order and can be categorised as follows:

  1. Spot Settlement -

    A spot settlement allows for a trade settlement immediately following the T+2 rolling settlement principal.
  2. Forward Settlement -

    A forward settlement might be used to settle a trade in the future on T+5 or T+7.

Meaning of Rolling Settlement

A rolling settlement involves the trade settlement being made in the successive days of the trade. A rolling settlement typically takes T+2 days. Let us look at a T+2 settlement example. If you place a buy order on a Monday, the shares will get credited into your account by Wednesday, assuming there is no holiday and the markets are open from Monday through Wednesday. Similarly, buying a stock on a Friday lets the shares get deposited into your account the following Tuesday.

What is trade settlement process on BSE?

Now that you know what trade settlement is, let us understand the settlement process on the BSE. All securities comprising the equity segment, government and fixed-income securities are settled on the BSE in "T+2" days. As per the BSE regulations, the pay-in and pay-out of monies and securities must be completed on the same day. After the BSE conducts the pay-out of funds and securities, it takes up to one working day to deliver securities and client payment.

What is trade Settlement in the NSE?

The trade settlement process on the NSE is described as follows.

Working Days Activity
T Rolling settlement trading
T+1 Clearing (This includes custodial confirmation and delivery generation)
T+2 Settlement through securities and funds pay-in and pay-out
T+2 Post settlement auction
T+3 Auction settlement
T+4 Reporting for bad deliveries
T+6 Pay-in-pay-out of rectified bad deliveries
T+8 Re-reporting of bad deliveries
T+9 Closing of re-bad deliveries

Settlement Violations

Settlement violations comprise cases wherein a trade is completed, but there is insufficient settled cash in the investor's account. The brokerage firm settles the contract if an investor does not submit the required funds by the settlement date. The brokerage firm may sell the investor's assets and penalise them for losses arising from a security value loss. The brokerage may even charge a particular interest or fee along with the penalty.

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Frequently Asked Questions (FAQs)

Trade settlement is a two-way process wherein the purchased securities are delivered to the buyer, and the seller receives cash. As you buy or sell financial securities, the actual transfer of ownership occurs on the settlement date.

The trade settlement date is when a transaction gets completed, i.e. the buyer can claim ownership of the securities, and the seller’s account gets credited with the cash.

No effort is made to deposit cash before the settlement date. Liquidating a position with a settlement before it was paid for is considered a violation.

The participants involved in the settlement process comprise depositors, clearing members, clearing banks, custodians, clearing corporations, and professional clearing members.

Cases, where a share transfer is not completed due to a violation of the exchange rules constitute a poor delivery.

During a trade, a buyer deposits money to the stock exchange, and the seller delivers the securities on the "pay-in" day. The stock exchange deposits the money into the seller's account, and the purchased shares are delivered to the buyer on the "pay-out" day.

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