Settlement (finance)

Settlement is the "final step in the transfer of ownership involving the physical exchange of securities or payment".

In the United States, the settlement date for marketable stocks is usually 1 business day after the trade is executed, often referred to as "T+1.

"[3] For listed options and government securities in the US, settlement typically occurs 1 day after trade execution.

Clearing involves modifying those contractual obligations so as to facilitate settlement, often by netting and novation.

Payment was usually made by paper cheque upon receipt by the registrar or transfer agent of properly negotiated certificates and other requisite documents.

In the market crash of 1987, many investors sought to limit their losses by selling their securities, but found that the failure of timely settlement left them exposed.

The interests of participants are recorded by credit entries in securities accounts maintained in their names by the operator of the system.

The settlement system does not stand in the chain of ownership, but merely serves as a conduit for communications of participants to issuers.

On settlement, the seller must produce the security's certificate and executed share transfer form in exchange for payment from the purchaser.

Many countries now dispense with the requirement that a physical stock certificate be produced, a process known as dematerialization, and have adopted electronic settlement systems.

To clear the trades, time was required for the physical stock certificate or cash to move from Amsterdam to London and back.

This led to a standard settlement period of 14 days which was the time it usually took for a courier to make the journey on horseback and by ship.

[8] In France, Italy, and, to some extent, Switzerland and Belgium, as well as some developing countries, the settlement of all transactions took place once a month on a fixed date.

[10] The Black Monday (1987) stock market crash[9] prompted a move to reduce settlement times.

Chile, Colombia, and Peru are slated to move to T+1 in 2025, and ESMA recommended the EU transition to T+1 on October 11, 2027.

For example, if a transaction occurs on a Friday, the payment or check must arrive at the broker's office by the close of business on Monday, unless a public holiday delays the settlement day.