What is Settlement Period


What is Settlement Period

In security industry, the settlement date is a term used to refer the period in which the securities handed over to the new owner, and the transaction is fully completed. In other words, a settlement period is a duration between the trade date, week, month, and year when the trade is performed and the settlement date when the trade is final.

When a particular share, or security is bought/sold, there are certain responsibilities that both parties must fulfil during the settlement period. During this settlement period, the seller must deliver the shares, or securities and the buyer must pay for the same.

New SEC Settlement Mandate - T+2

The time duration of settlement period has changed over the years as security trading moved from manual to electronic transactions. Initially, the SEC had set the settlement period to 5 working days. However, it was revised in 1993, when the SEC changed the settlement period from 5 working days to 3 working days, which means that a transaction executed on Monday would be completed by Thursday, as long as these days should be working days.

In march 2017, the SEC again revised the settlement period from 3 working days to 2 working days to reduce the credit and market risks for transaction parties. A 2-day waiting period was necessitated by the improvements in technology, where parties could execute a trade and transfer ownership of the security quickly in a convenient way.
When referring to the settlement period, brokers use” T+” refer to the number of working days the transaction will take to complete. For example, “T+1” means “transaction date plus one day."

Example for T+1 settlement

In case of Buy
You buy share on Monday (T Day).
1. The share gets credited back to your demat account on Tuesday (T+1) day.

In case of Sell
1. You sell share on Monday (T Day).
2. Funds get credited to your trading account on Tuesday (T+1 day). Then you can withdraw the funds post this.

Related Articles