Settlement (finance)

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Settlement is the "final step in the transfer of ownership involving the physical exchange of securities or payment".^[1] After settlement, the obligations of all the parties have been discharged and the transaction is considered complete.^[2]

In the context of securities, settlement involves their delivery to the beneficiary, usually against (in simultaneous exchange for) payment of money, to fulfill contractual obligations, such as those arising under securities trades. Nowadays, settlement typically takes place in a central securities depository. 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. In Europe, settlement date has been adopted as 2 business days after the trade is executed. 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.