Settlement

Key Highlights

• Settlement in finance refers to the process of completing a financial transaction.

• This process involves transferring the ownership of a security or other financial instrument, as well as any associated funds, from the seller to the buyer.

What is Settlement?

Settlement in finance refers to the process of completing a financial transaction. This process involves transferring the ownership of a security or other financial instrument, as well as any associated funds, from the seller to the buyer.

In general, settlement is an important process that helps to ensure the smooth and efficient functioning of financial markets by facilitating the transfer of ownership and risk between parties to a transaction.

Key Features of Settlement in Trading

• Finality: Once a trade is settled, it’s considered complete. The buyer gets the shares, the seller gets the money, and neither can back out.

• Process: Before settlement, there’s a clearing stage where trade details are checked and confirmed. Then comes settlement - where the actual exchange of money and shares happens.

• Settlement Date and Cycle: Settlement date marks the official transfer of money and shares, making the trade complete. The time between the trade and settlement is called the settlement cycle. For example, in India and the US, most stock trades follow a T+1 cycle—which means if you buy on Monday, the settlement happens on Tuesday.

• Risk: There’s something called settlement risk - this is the risk that one side doesn’t hold up their end of the deal (like not paying or not delivering shares). Systems like clearing houses and strict regulations help manage this risk.