Trade settlement refers to the transfer of securities and funds between buyers and sellers after a trade is executed. In the Indian stock market, this process operates on a T+1 settlement cycle, meaning that securities are delivered, and funds are received one day after the trade takes place. Essentially, on the settlement date, ownership of financial securities switches from the seller to the buyer, and payment is transferred accordingly.
Trade settlement
Trade settlement is a two-way process that involves the exchange of cash and securities between the buyer and the seller. When a trade is executed, the buyer and the seller agree on a trade price, and the securities that have been bought and sold. Once the trade has been executed, the settlement process starts to ensure that the terms of the trade are met, and the exchange of cash and securities is completed.
What is the settlement date?
The settlement date is the date on which the trade settlement is completed, and ownership of the securities is transferred from the seller to the buyer. It is the date on which the cash is paid, and the securities are delivered. The settlement period through securities and funds pay-in and pay-out has to be done on T+1. The T stands for "transaction", and the number represents the number of days between the trade date and the settlement date. For instance, T+1 settlement means that the settlement will occur one business day after the trade date.
What is settlement in stock market and the different types?
In the stock market, settlement refers to the process of transferring the ownership of securities from the seller to the buyer. There are two types of settlement - Rolling Settlement and Account Settlement.
Rolling settlement is a process where trades are settled on T+1 day. In this process, the settlement period keeps rolling forward every day. For example, if the rolling settlement period is T+2, then at the end of day one of the settlement period, the period would be T+1, and at the end of day two, the period would be T+2.
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
In the trade settlement process, there can be settlement violations that can occur due to various reasons, such as short selling, bad delivery, and auction settlement. A short sell violation happens when the seller sells securities that they do not own or have not borrowed to sell. A bad delivery violation happens when the securities delivered do not match the seller's obligations to deliver, and auction settlement happens when the trades cannot be settled in the regular settlement process, and an auction is conducted to settle the trade.
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.
