Trade settlement refers to the process by which the ownership of a security is transferred from the buyer to the seller in exchange for payment. It’s an essential stage in trading, marking the completion of a trade. On the Indian stock market, this process is governed by specific rules and timings to ensure that all trades happen smoothly and with less risk.
- What Is Trade Settlement?
- What Is T+1 And T+2 Settlement?
- Types Of Settlement In Stock Market
- What is trade settlement in BSE?
- What is trade Settlement in the NSE?
- What Is Rolling Settlement?
- Trade Date Vs Settlement Date
- Trade Settlement Process
- What Is Trade Settlement – Quick Summary
- Trade Settlement – FAQs
What Is Trade Settlement?
Trade settlement is when the shares are officially moved from the seller’s account to the buyer’s account. At the same time, the buyer’s payment goes to the seller. This step ensures the trade is complete, and everyone gets what they agreed on.
For example, if Mr. Sharma buys 100 shares of Tata Motors at ₹150 per share, the trade settlement will involve transferring the shares to Mr. Sharma’s demat account and debiting his bank account by ₹15,000, simultaneously crediting the seller’s bank account.
What Is T+1 And T+2 Settlement?
The T+1 and T+2 settlements refer to the number of business days required to settle a trade after the transaction day (T). T+1 means the settlement occurs one day after the trade date, while T+2 takes two days. For instance, if a trade happens on a Monday, under T+1, the settlement would be on Tuesday, whereas under T+2, it would be on Wednesday.
Types Of Settlement In Stock Market
There are various types of settlements in the stock market, including:
- T+1 Settlement
- Weekly Settlement
- Monthly Settlement
- T+1 Settlement: In this type of settlement, the “T” stands for the Trade Date, and the “+1” indicates that the settlement is finalized one business day after the trade is executed. This is a rapid process that ensures a quick transfer of securities and funds.
- Weekly Settlement: Weekly Settlement is commonly found in derivatives markets, particularly for futures and options. Here, all trades executed during a specific week are settled collectively at the end of that week. This process provides a regular and structured timeframe for participants to manage their positions.
- Monthly Settlement: Monthly Settlement refers to settling certain contracts at the end of the month. Often applied to long-term contracts or specific investment instruments, this method aligns the settlement process with monthly financial cycles. It can aid in consolidated accounting and risk management.
What is trade settlement in BSE?
Trade settlement in the Bombay Stock Exchange (BSE) refers to finalizing trades executed on the exchange. It takes one business day (T+1) to complete the settlement process. During this time, the securities are transferred to the buyer’s demat account and the payment is made to the seller’s account.
For example, if an investor buys 50 shares of Infosys on BSE at ₹1,200 per share on a Monday, the shares will be credited on Tuesday.
What is trade Settlement in the NSE?
Trade settlement in the National Stock Exchange (NSE) is the process of finalizing trades executed on the exchange. It takes one business day (T+1) to complete the settlement process. During this time, the securities are transferred to the buyer’s demat account.
For instance, if a trader sells 100 shares of HDFC Bank on NSE at ₹1,500 per share on Monday, the settlement will take place on Tuesday. The shares will be transferred to the buyer’s account on Tuesday, and the ₹1,50,000 will be credited to the seller’s account on Tuesday.
What Is Rolling Settlement?
Rolling settlement is like a conveyor belt for trades. Each day’s trades get processed on the next available day, one after the other. Unlike the old system where everything was settled on a specific day, in rolling settlement, every day’s trades have their own separate settlement day that follows right after. So, if you trade today, it’ll be settled tomorrow, and if you trade tomorrow, it’ll be settled the day after, and so on.
Trade Date Vs Settlement Date
The main difference between the Trade Date and the Settlement Date is that the trade date is the day on which a trade is executed and an agreement is reached between the buyer and seller. In contrast, the Settlement Date is when the transaction is finalized and the actual exchange of money and securities occurs.
|Parameter||Trade Date||Settlement Date|
|Definition||Date of executing the trade||Date of completing the settlement|
|Importance||Initiates the trading process||Finalizes the transaction|
|Relation to other trades||Independent of other trades||Based on the rolling settlement|
|Regulatory implications||Subject to trading rules||Governed by settlement rules|
|Financial Impact||No immediate financial impact||Funds and securities are transferred|
|Market Risk||Exists between trade and settlement date||Mitigated after the settlement|
|Relevance to Buyer/Seller||Commitment to trade||Obligation to complete the transaction|
Trade Settlement Process
The trade settlement process begins with a matched order between the buyer and seller. Post-execution, the clearinghouse confirms details and transfers securities to the buyer’s demat account, while funds are moved through secure gateways. Both securities and funds are exchanged on a set settlement date.
- Trade Execution: This is the first step, where a trade is initiated between a buyer and a seller. The order is placed through a broker, and once the terms are agreed upon, the trade is matched on the exchange, marking the Trade Date.
- Clearing: Following the execution, the trade details are sent to a clearinghouse. The clearinghouse acts as an intermediary and confirms the trade details, ensuring both parties know their obligations. This step mitigates the risk of one party failing to meet their commitments.
- Transfer of Securities: Once the trade is cleared, the securities involved are transferred to the buyer’s demat (dematerialized) account. This electronic transfer ensures that the ownership of the securities is securely and accurately recorded, facilitating the elimination of paperwork and manual errors.
- Payment Process: Simultaneously with the transfer of securities, the payment process is initiated. The buyer’s account is debited for the agreed amount, and the seller’s account is credited. This transaction often goes through a secure and regulated payment gateway to ensure the integrity of the financial transfer.
- Settlement Date: This is the day when both the securities and the funds are exchanged between the parties. Depending on the market and the type of security, this may occur on a T+1 or T+2 basis (one or two business days after the Trade Date).
What Is Trade Settlement – Quick Summary
- Trade settlement is the process by which securities are delivered in exchange for payment, ensuring the completion of a trade.
- Different settlement types include T+1, Weekly, and Monthly, adapted based on regulatory requirements and market practices.
- Settlement in BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) follows similar structures, complying with Indian market regulations.
- Rolling settlement is the continuous settlement of trades on successive days, promoting efficiency.
- The difference between Trade Date Vs Settlement Date is that the Trade Date marks the initiation, while Settlement Date is when both securities and funds are exchanged.
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Trade Settlement – FAQs
What Is Trade Settlement?
Trade settlement is the procedure by which a trade is finalized, where securities and funds are exchanged between the buyer and seller, ensuring that both parties meet their obligations.
What are the modes of trade settlement?
Following are the modes of trade settlement:
|Mode of Settlement||Description||Commonly Used For|
|T+1 Settlement||Settled in one business day after the trade.||General securities trading|
|Weekly Settlement||Settled at the week’s end.||Futures and options trading|
|Monthly Settlement||Settled at the month’s end, according to the specific terms of a contract||Certain types of contracts|
What is the settlement process?
The settlement process includes Trade Execution, Clearing, Transfer of Securities, Payment processing, and finishing on the Settlement Date.
What is the trade settlement date?
The trade settlement date is when the exchange of securities and payment is completed, marking the final step in a trade transaction.
Why does settlement take 2 days?
Currently, the settlement of shares in NSE & BSE is done on T+1 Day.