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.

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.

To avoid incurring interest (margin) charges, it is wise to match the settlement dates when selling one investment and purchasing another. Typically registered accounts do not allow margin, so you might need to plan sales with settlement dates in mind so that funds are available to make subsequent purchases.

Canadian and US dates may differ

Because of different holiday schedules in Canada and US,[4] 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 23rd, 2016 - final trade date for Canadian equities for settlement in 2016 tax year[5][6].
  • Dec 27th, 2016 - final trade date for US equities for settlement in 2016 tax year.[5][6]
  • Dec 29th, 2016 - final trade date for Options for settlement in 2016 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.[7] [8] This change was synchronized with the United States which has also moved to T+2 on September 5, 2017.[9]

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. TMXmoney, Stock Market Trading Hours, Stock Market Hours and Holidays, viewed September 15, 2015.
  5. 5.0 5.1 "Tax treatment of investments - trade and settlement dates; Last trading date for 2016". TaxTips.ca. http://www.taxtips.ca/personaltax/investing/taxtreatment/tradeandsettlement.htm. Retrieved 13-Dec-2016.
  6. 6.0 6.1 "2016 Tax Information Centre". TD Direct Investing. https://www.td.com/ca/products-services/investing/td-direct-investing/investor-education/tax-information-centre.jsp.
  7. "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.
  8. "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.
  9. "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