Reviewed by Oct 05, 2020| Updated on
The settlement date is defined as the day on which the trade is finalised, and the person purchasing (buyer) should complete the payment process to the person selling (seller). On the settlement date, the seller will deliver the securities or assets to the buyer.
Generally, for bonds and stocks, the settlement date is two working days from the date of execution (T+2). It is (T+1) in the case of government securities and options. When it comes to spot foreign exchange, the settlement date is two business days post the date of the transaction.
Derivative and options contracts have settlement dates for trades apart from the expiry date of the contract. In the case of life insurance policies, the date on which the policy proceeds are settled is known as the settlement date.
The financial markets will clearly mention the number of working or business days after the completion of a transaction for which assets or securities have to be delivered and paid for. This difference in the settlement date and transaction was previously due to the time needed for the seller to deliver.
Previously, the transactions of the securities were made manually; it is now done electronically. Investors and traders had to wait until the delivery of a specific security are made, and the buyer would not make any payment until he or she has received the same.
As the delivery time differs and prices are susceptible to several factors, they may fluctuate. Therefore, the regulators of the securities market have set the timeframe within which the respective parties should deliver the securities and cash. In today’s world, the transactions are completed in a much shorter timeframe with the help of the latest technology.