Settlement

Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against (in simultaneous exchange for) payment of money, to fulfill contractual obligations, such as those arising under securities trades.

As part of performance on the delivery obligations entailed by the trade, settlement involves the delivery of securities and the corresponding payment. A number of risks arise for the parties during the settlement interval, which are managed by the process of clearing, which follows trading and precedes settlement.

This article first presents settlement dates for different types of securities, then discusses some practical implications for individual investors using discount brokerage accounts, including common mistakes and their consequences.

Settlement date
Settlement date is a securities industry term describing the date on which a trade (bonds, equities, foreign exchange, commodities, etc.) settles. That is, the actual day on which transfer of cash or assets is completed.

It is not necessarily the same as value date (when the settlement amount is calculated). For instance, the back office may require a few days to make payment. This gap (between valuation and settlement) is often written into the financial contract, although the actual settlement date can also differ from that originally specified because of problems or errors.

It is generally described in the form "T+n", where "T" is the date of the trade and n is the number of business days following before the funds are transferred.

Settlement dates are generally in accordance with the following table:
 * {| class="wikitable" align="center" style="text-align:center;"

! Security !! Settlement Date
 * Canadian and U.S. equities || T+2
 * Foreign equities || varies, depending on market
 * Mutual Funds (except MMFs)||T+2, subject to brokerage cut-off times
 * Money Market Funds || T+1
 * Short-term Bonds (3 years or less) || T+2
 * Long-term Bonds (over 3 years) || T+2
 * Mortgage-backed Securities || T+2
 * Money market Instruments || same business day
 * Fund-Based HISAs || T+1
 * Canadian and U.S. Options|| T+1
 * Strip Coupons (under 1.5 years) || T+2
 * Strip Coupons (over 1.5 years) || T+2
 * U.S. Treasury Bonds || T+1
 * Eurobonds || T+2
 * Gold and Silver Certificates || T+2
 * GIC Purchasea || T+0 or T+1
 * }
 * Fund-Based HISAs || T+1
 * Canadian and U.S. Options|| T+1
 * Strip Coupons (under 1.5 years) || T+2
 * Strip Coupons (over 1.5 years) || T+2
 * U.S. Treasury Bonds || T+1
 * Eurobonds || T+2
 * Gold and Silver Certificates || T+2
 * GIC Purchasea || T+0 or T+1
 * }
 * Eurobonds || T+2
 * Gold and Silver Certificates || T+2
 * GIC Purchasea || T+0 or T+1
 * }
 * GIC Purchasea || T+0 or T+1
 * }
 * }


 * a. GIC purchase settlement dates may vary between institutions.

Practical implications
The settlement period is typically not visible to individual investors buying stocks, bonds or ETFs using cash balances in their discount brokerage account. Another problem-free scenario is selling one security, then replacing it with another having the same settlement cycle, on the same exchange.

However the following are some of the settlement-related issues that could arise:


 * If you plan to pay for your purchase by selling another security, make sure you will receive the cash from the sale in time to cover the purchase, i.e. match the settlement dates. For example, selling an ETF or stock (T+2) to immediately buy a money market fund (T+1) could cause interest to be charged in a margin account, or the trade to be rejected in a registered account.


 * In a margin account, you can buy something today and then deposit the cash before the settlement date. But if you wait too long to transfer the cash, you will pay some interest.


 * In registered account, some brokers allow securities purchases without a cash balance, if sufficient funds exist in a fund-based investment savings account (ISA) or money market mutual fund (MMF) that has T+1 settlement, in that same registered account. However you have to sell the ISA or MMF yourself, in order to cover your purchase, or sell another investment while watching the settlement dates. Otherwise, high interest charges might apply.


 * Canadian and US dates may differ. Because of different holiday schedules in Canada and US, the number of business days from a particular day may be different.

Year end tax planning
Awareness for the settlement dates for trades and the differences between the dates for Canadian and US exchanges can be particularly important when tax planning at the end of the year, which is when tax loss harvesting tends to occur.

Changes in 2017
The Canadian investment market has moved to shorten the settlement cycle from a previous T+3-settling securities (equities, long-term debt and many mutual funds) to T+2, on September 5, 2017. This change was synchronized with the United States which has also moved to T+2 on September 5, 2017.