x What is Settlement Period?

What is Settlement Period?

What is Settlement Period?

A settlement period is a duration in which the securities are handed over to the new owner, and the transaction is fully completed. In the security market, 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 stock, share, or security is bought or sold, there are certain responsibilities that both parties must fulfill during the settlement period. During this settlement period, the seller must deliver the stocks, shares, or securities, and the buyer must pay for the same. Once the obligations are completed, the holder is the new owner of the security.

The settlement period has changed frequently over a period, and the SEC (Security and Exchange Commission) has made significant changes. To facilitate the settlement process smoothly, congress enacted section 17A of the Securities Exchange Act of 1934, which directs the SEC (Security and Exchange Commission) to create a national clearance and settlement system to complete the transactions. The SEC (Security and Exchange Commission) has rules on how to proceed with the transactions of the securities, which is when the trade settlement cycle was created.

Initially, the trade settlement period gave a sufficient amount of time for both buyers and sellers to complete the transaction, which is to sell the stock, share, or securities at a price and hand over the securities to the buyer. Once the transaction is completed, the holder of the securities is the new owner.

As compared to the earlier process, the settlement period has made significant changes in how it works. Now it requires the buyer to have sufficient funds in their account before they can buy stocks, shares, or securities. Besides, earlier, the process involved issuing the paper certificates to represent the ownership while now everything is digital, and so, the certification process. Now, the buyers get digital ownership of such trades called book-entry. Though, the previous paper certificates still exist and are valid as long-term investors have them preserved.

There have been a few massive changes in how the settlement period works. Earlier, the settlement period duration was up to 5 business days which was a convenient option to complete the transaction, but now it has been reduced to 3 business days. This is also the reason why the settlement period is called T+3. The change of duration from 5 business days to three business days was made in the year 1993 by the SEC (Security and Exchange Commission).

The SEC was satisfied with the time duration of T+3 when the securities were exchanged through postal systems, but with the digital age, it became much easier to transfer shares, bonds, securities, and stocks. So, in 2017, the SEC came up with a new duration for the settlement period, which is only two business days. Within these T+2 days, the transactions are to be completed.

If the seller fails to transact the security, share, or stock to the buyer within the settlement period, a penalty or interest fee is charged each day till the transaction is completed.

Final Words

The settlement period is a duration in which the securities are handed over to the new owner, and the transaction is fully completed. In the security market, 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. Earlier, the Security and Exchange Commission had allowed five business days to complete the transaction where the entire selling to buying process has to be completed, but then in 1993, the duration was changed to 3 business days, and finally in 2017, in the digital era, SEC changed the duration of the transaction to 2 business days.

  • What is the settlement period?
  • The settlement period is a duration in which the securities are handed over to the new owner, and the transaction is fully completed. In the security market, 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.

  • What does it mean by T+2 in the settlement period?
  • The term T+2 signifies two business days from the day transaction (T) was initiated or executed.

  • What is the length of duration for the settlement period?
  • Earlier, the Security and Exchange Commission) had allowed five business days to complete the transaction where the entire selling to buying process has to be completed, but then in 1993, the duration was changed to 3 business days, and finally in 2017, in the digital era, SEC changed the duration of the transaction to 2 business days.

  • What happens during the settlement period?
  • During the settlement period, the buyer pays for the stocks, shares, or securities, and in exchange, it is the responsibility of the seller to transfer them to the buyer. Once the buyer receives them, he/she is the owner of those stocks, shares, or securities and can trade them as per his/her own trading strategy.

  • What happens if the seller fails to transfer the securities within the settlement period?
  • If the seller fails to transact the security, share, or stock to the buyer within the settlement period, a penalty or interest fee is charged each day till the transaction is completed.