Settlement Cycle

What is Settlement Cycle and what is the difference between T+1 and T+2 settlement?

The Settlement Cycle refers to the time taken to complete the back-end activities of a financial transaction, after the transaction has been initiated. The cycle involves completion of the Clearing process and the Settlement process before the asset can be transferred from one party to another.

Settlement is a broad term and it could be used in different contexts in different industries.

Example: In Banking industry, Settlement of a Cheque happens when money is transferred from the payer to payee.
In capital markets, the term is used for delivery of securities to the buyer and simultaneous delivery of money to the seller.

This page will focus on Settlement in case of buying/selling of stocks and other securities through the stock exchange.

Settlement in stock markets

When buying through exchanges, the term ‘Settlement’ refers to the conclusion of the trade after securities have been credited to the Demat Account of the buyer. And at the same time, the consideration amount is credited to the seller.

Many investors believe that their trade gets completed as soon as the order is executed on the exchange. However, a trade is not completed until the following 3 steps are successfully done:

(Some investors, brokers, news sources etc. might mention the Clearing process to be a part of the Settlement process.)

The Clearing and Settlement activities are considered to be back-office activities, after a trade is completed. The time taken to complete these activities is called as the trade Settlement Cycle.

T-Day

The Trade day (T-Day) refers to the day on which the trade was executed on the Stock Exchange. So, a T+3 day means the third day, after the trade date (when settlement is on a rolling basis). Similarly, a T+1 day would refer to the next day, after the trade day.

Rolling Settlement

The Rolling Settlement refers to the mechanism of settling trades on consecutive days after the trade has been executed. This means that if a market follows a T+2 settlement on a rolling basis, then the settlement will be completed on the second working day after the trade day. (Weekends and Holidays are not counted)

Settlement on rolling basis has been globally accepted as the best practice for Settlement of securities. When trading mostly happened through physical share certificates, the delivery of certificates and the payment used to happen on different days (sometimes many days apart). However, in case of Rolling Settlement, the securities and funds are transferred to the buyer and seller respectively on the same day.

Current scenario

Trading of Stocks, Bonds, ReITs, InvITs etc. through the Stock Exchange has been following a T+2 settlement since 1 April, 2003. Whereas settlement of Derivatives (Futures and options, Commodities etc.) happens on a T+1 basis. Settlement of Mutual Funds depends on the type of fund being traded.

Starting from Feb/Mar 2022, the settlement in India has started moving to T + 1 cycle for some securities. The transition is being done in phases, where few hundred stocks are moved each month, from the old T + 2 cycle to the new cycle.

Although the securities are not credited to the Demat Account of the buyer right away, it is still possible to sell them on the next day of buying. This type of trade carries some risks and is known as Buy Today, Sell Tomorrow (BTST).

T+1 Settlement

Let us have a quick look on the activities performed in a T + 1 cycle. Currently, this cycle is followed in India for Stocks, Fixed Income securities, ReITs, InvITs, Stock Derivatives, Commodity Derivatives, Exchange Traded Funds (ETFs) etc.

  • T Day
    Execution of the trade on the Stock Exchange.
    Clearing House starts the Clearing Process. Obligations of different parties is notified to the Clearing Member.
    In case of derivatives, Mark to Market profit/loss is the obligation for the day.
  • T + 1 day
    Pay in and Pay out of securities and funds happens on this day. In case of derivatives, the amount for Mark to Market profit/loss is transferred. So this is the day when the obligations get settled and is therefore also called as Settlement day / Payin day / Payout day etc.

    Auction is conducted for securities (Except stock derivatives) that were Short Delivered.

  • T + 2 day
    Settlement of the securities traded in the Auction process.

In case of settlement of physical shares, reporting and rectification of bad deliveries starts on T+3 day and the process can last for few days.

Investors should note that, in case a Stock Derivative contract is being settled on expiry by delivery of shares, then the auction for Short Delivery happens on T+2 day and the settlement happens on T+3 day.

In case of settlement of physical shares, reporting and rectification of bad deliveries starts on T+2 day and the process can last for few days.

T+2 settlement

Let us have a quick look on the activities that are performed in a T + 2 cycle. This cycle used to be followed in India till January 2023, but now the settlement happens on T+1 basis. However, some countries still follow a T+2 cycle.

  • T Day
    Execution of the trade on the Stock Exchange.
  • T + 1 day
    Clearing House starts the Clearing Process. Obligations of different parties is notified to the Clearing Member, who verifies these obligations of their clients.
  • T + 2 day
    Pay in and Pay out of securities and funds happens on this day. So this is the day when buyer receives the securities in their Demat Account and the seller receives money. It is also called as Settlement day / Payin day / Payout day etc.

    Auction is conducted for securities that were Short Delivered.

  • T + 3 day
    Settlement of the securities traded in the Auction Process.

Disclaimer

  • This page is for education purpose only
  • Some information could be outdated / inaccurate
  • Investors should always consult with certified advisors and experts before taking final decision
  • Some images and screenshots on this page might not be owned by FinLib

Scroll to Top