Settlement

Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods.

The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled.

This process could take a few hours or several days after a trade is made. It depends on the clearance process.

In the United States, the settlement date for marketable stocks is usually 2 business days or T+2 after the trade is executed, and for listed options and government securities it is usually 1 day after the execution.

Conversely in Europe, settlement date has also been adopted as 2 business days settlement cycles T+2.

Settlement Explained

A settlement is also the process of the payment of an outstanding account balance, an open invoice or charge.

The electronic settlement system is a relatively new construct that has only become a standard in the past thirty years.

For example, in real estate finance, you have settlement when the funds are accepted, and the deed to the property is traders to the new owner.

Settlement can also mean an adjustment or agreement reached in matters of finance or business. For example, we have settled with the bank or the credit card company.

A number of risks arise for the parties during the settlement process. These are effectively managed by the process of clearing, which follows trading and precedes settlement.

By extension, clearing involves modifying those contractual obligations so as to facilitate settlement, often by netting and novation.