There are two main types of stock investment settlements you may come across:
1. Spot settlement
This type of settlement occurs promptly, typically following the standard T+2 rolling settlement cycle. That means the transaction is finalized two business days after the trade date.
2. Forward settlement
In a forward settlement, the buyer and seller agree to settle the transaction at a future date—beyond the usual cycle—such as T+5 or T+7. This is often used in customized or over-the-counter agreements.
Meaning of rolling settlement
A rolling settlement means that any transaction made will be settled in one business day. Traders in the financial market rely on this method of settling trades in T+1 days. For example, if you purchase a security today, it will be transferred to you, and the transaction will be settled by the next business day. If a security is bought on a Monday, it will be settled by Tuesday. If you make a purchase on Friday, it will be closed by Monday. It is important to note that weekends and bank and exchange holidays are not considered business days.
For traders in the equities market, the day of the settlement holds immense significance as it directly affects dividend payments.
What is trade settlement process on BSE?
The trade settlement process on the Bombay Stock Exchange (BSE) is based on the rolling settlement system. The settlement period for the BSE is T+1, which means that the trades are settled within one business day of the trade date. The settlement cycle is divided into different phases. These include trade date, pay-in, and pay-out. During the pay-in phase, the buyers must pay the funds for the securities they have purchased, and during the pay-out phase, the sellers receive the funds for the securities they have sold.
What is trade Settlement in NSE?
The National Stock Exchange (NSE) has a similar trade settlement process to that of the BSE. The settlement period for the NSE is also T+1. The settlement cycle in NSE is divided into five phases - trade date, trade confirmation, pay-in, pay-out, and closeout. During the pay-in phase, the buyers must pay the funds for the securities they have purchased, and during the pay-out phase, the sellers receive the funds for the securities they have sold.
Settlement cycle on the NSE
Please see the table below to learn about the settlement cycle on the NSE:
Activity
|
Number of working days
|
Rolling settlement trading
|
T
|
Clearing processes, including delivery processing and custodial confirmation
|
T+1
|
Settlement activities, including the pay-in and payout of securities and funds and valuation debit
|
T+1
|
Post-settlement auction
|
T+1
|
Settlement of auction
|
T+2
|
‘T’ in the table refers to the day of a transaction or the trading day.
Settlement violations
Settlement violations occur when an investor buys securities without having enough settled funds in their account by the settlement date. If the investor fails to provide the required funds on time, the brokerage firm becomes responsible for completing the transaction.
If payment isn’t received by the settlement deadline, the brokerage may liquidate the purchased security—effectively cancelling the trade—and hold the investor accountable for any losses due to a drop in the security’s market value. Additionally, the brokerage may impose interest charges or penalties.
While margin accounts are often offered to let investors borrow funds for trading, many of these accounts still require sufficient settled cash before a purchase can be completed.
Conclusion
Trade settlement is an integral part of the trading process in the stock market. It involves the exchange of cash and securities between the buyer and the seller. The settlement process is divided into different phases, such as trade date, pay-in, and pay-out.
While trade settlement is a complex process, it is the backbone of the stock market, and without it, the entire trading process would be in chaos.
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