Settlement

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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.[1]

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.[2]

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:[3]

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
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.[4] 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.[4]
  • 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.[5] 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.[6]
  • Canadian and US dates may differ. Because of different holiday schedules in Canada and US,[7] 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. Important dates for security settlement are:

  • Dec 27th, 2017 - final trade date for Canadian equities for settlement in 2017 tax year[8]
  • Dec 27th, 2017 - final trade date for US equities for settlement in 2017 tax year.[8]
  • Dec 28th, 2017 - final trade date for Options for settlement in 2017 tax year.

You should also check with your discount broker because some markets close early around holidays.

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.[9] [10] This change was synchronized with the United States which has also moved to T+2 on September 5, 2017.[11]

See also

References

  1. Wikipedia, Settlement, viewed July 28, 2012.
  2. Wikipedia, Settlement date, viewed July 28, 2012.
  3. RBC Direct Investing, Settlement, viewed September 15, 2015.
  4. 4.0 4.1 Canadian Couch Potato, How T+2 Settlement Affects ETF Investors, 28 August 2017, viewed November 15, 2017.
  5. Financial Wisdom Forum, members AltaRed, gobsmack and pmj, T plus two business days Starts Sept 5 2017, November 11, 2017.
  6. Financial Wisdom Forum, member Shakespeare, T plus two business days Starts Sept 5 2017, November 11, 2017
  7. TMXmoney, Stock Market Trading Hours, Stock Market Hours and Holidays, viewed September 15, 2015.
  8. 8.0 8.1 "Tax treatment of investments - trade and settlement dates; Last trading date for 2017". TaxTips.ca. http://www.taxtips.ca/personaltax/investing/taxtreatment/tradeandsettlement.htm. Retrieved 13-Dec-2017.
  9. "T+2: What’s New". Canadian Capital Markets Association (CCMA). 31-Mar-16. http://ccma-acmc.ca/en/wp-content/uploads/CCMA-T2-Newsletter-March-31-2016.pdf. Retrieved 13-Dec-16.
  10. "CCMA Canadian T+2 Asset List". Canadian Capital Markets Association (CCMA). 14-Jul-17. http://ccma-acmc.ca/en/wp-content/uploads/Final-Asset-List-Moving-to-T2-Settlement-July-14-2016-1.pdf. Retrieved 06-Sep-17.
  11. "Financial Services Industry Shortens Trade Settlement Cycle In The U.S.". 05-Sep-17. http://www.ust2.com/pdfs/T2-Steering-Committee-Joint-Release-on-Launch.pdf. Retrieved 09-Sep-17.

Further reading

External links