Settlement
In financial transactions, settlement refers to the finalization of obligations between buyer and seller. It involves the payment and delivery of the agreed financial instrument. Settlement results in the transfer of ownership and the fulfillment of contractual obligations, provided both parties meet their responsibilities.
Definition: Settlement and Clearing
Historically, the settlement period gave counterparts time to deliver cash and securities. During this period, rights to the securities and the purchase price were exchanged. In the past, funds were transferred via wire transfer and securities were physically delivered, which meant payment and delivery typically had to be completed within two business days.
Today, trades are recorded immediately, but the final transfer of ownership only occurs after the settlement date (generally T+1 or T+2, depending on the product).
Transactions involving securities, currencies, and derivatives are now usually cleared by central clearinghouses. These clearinghouses act as intermediaries between buyer and seller, reducing the risk that either party fails to deliver funds or securities. Settlement is then completed through the clearing system.
Transactions & Settlement
Making a trade might feel instant, but two important dates apply:
Transaction date:
The day you execute a trade.
Settlement date:
The day the trade is finalized and obligations are fulfilled.
The settlement date is when payment for purchases is due, securities sold must be delivered, and the transfer agent records the new shareholder. Settlement refers to the final transfer of securities to the buyer’s account and cash to the seller’s account.
Overview of settlement periods by product
The settlement of transactions follows specific time frames that depend on the type of financial product.
- Stocks (except US, Canadian and Mexican stocks), ETFs, and warrants generally have a settlement period of two business days (T+2).
- US, Canadian, and Mexican stocks, as well as options and futures contracts generally settle within one business day (T+1).
Please note: settlement can be affected by public holidays, which may result in transactions in certain currencies being postponed. If a settlement date falls on a public holiday, it will move to the next available business day.
Please refer to the table below for a general overview of the most common settlement periods:
| Asset class | Settlement period |
|---|---|
| Stocks/ETPs/ADRs (Except US, Canadian and Mexican Stocks) | T+2 |
| US, Canadian & Mexican Stocks/ETPs | T+1 |
| Stock Options (Equity Options) | T+1 |
| Index Options | T+1 |
| Futures | T+1 |
| FOPs (Future Options) | T+1 |
| Forex | T+2 |
| Bonds | Usually T+2, US Treasuries T+1 |
| CFDs | Same as Underlying |
| Metals (XAUUSD, XAGUSD) | T+2 |
| Warrants/Structured Products | T+2 |
Since May 2024, the settlement period for US, Canadian, and Mexican stocks and certain other financial products has been shortened from two business days (T+2) to one business day (T+1). This change may affect certain account processes, depending on the account type.
More information can be found here: Shift to T+1 settlement cycle
Settlement period: Stocks and Forex
Cash account: trading stocks in foreign currencies
For trades in stocks denominated in foreign currencies, the settlement period is particularly relevant. To purchase stocks in a currency not held in your trading account, it may be necessary to first convert funds into that currency. In most cases, the settlement period for the stock purchase and the currency conversion is aligned, making it possible to purchase stocks immediately after conversion.
An exception applies for U.S., Canadian, and Mexican stocks. These have a settlement period of one business day (T+1), whereas currency conversions generally settle on T+2. In such cases, a conversion may need to be arranged in advance so that both settlements align.
With a cash account, it is important to monitor settlement days. For example, trades may need to be fully settled before new trades in the same product can be executed, to prevent overlap between transactions.
Margin account: Reinvestment of funds from selling stocks
Suppose you sell stock on Monday, the funds from that sale will settle on Wednesday. If you promptly invest these funds in other stocks, they will not have been settled yet. However, the payment for the stock purchase will be settled on Wednesday, coinciding with the settlement of the selling transaction. As a result, you will not be subject to interest charges (assuming the settled cash balance in that currency is positive on Wednesday).
The aforementioned example also clarifies whether you would pay interest for borrowing currency if you immediately invested the funds from a selling transaction (provided that the newly chosen financial instrument has the same settlement period).
Please note: Credit interest will accrue only after the full settlement of your transactions. This is the same for cash accounts.
Settlement period: Options and Forex
Cash Account: Options Trading in Foreign Currencies
Options trades typically settle within one business day. Unlike stock purchases, options cannot be traded immediately after a currency conversion is completed. In practice, this means a waiting period of one business day applies before an option order can be placed.
Margin account
If an option is traded without funds in the quoted currency, the required amount in that currency will be borrowed for one trading day. Debit interest may apply for this borrowing.
Settlement period: Futures
Futures contracts settle on the business day following the trade (T+1). If you buy a futures contract today, payment is due the next business day. Similarly, the counterparty is required to deliver the underlying asset on the next business day.
Futures on their expiry
At expiry, futures contracts are settled on a specific date. Depending on the contract, settlement occurs either in cash or through physical delivery. Physical delivery involves the transfer of the specified product from seller to buyer.
Please note: Through LYNX, physical delivery is generally not available. To avoid settlement claims, futures positions generally must be closed before the expiry date.
- First Position Date: The earliest date a seller may inform the clearing system of delivery intent.
- First Notice Date: The earliest date a buyer may be informed of a possible delivery.
Futures settlement overview
For more information about the Close-Out Policy of Futures, please visit our partner’s page:
Futures Close Out | Interactive Brokers Ireland
The table on that page shows the First Notice Date and First Position Date for specific futures contracts. Futures positions should generally be closed two days before the Cutoff date to avoid settlement obligations.
- Long Futures Cutoff: Date by which long positions are expected to be closed.
- Short Futures Cutoff: Date by which short positions are expected to be closed.
FAQ
How do I see if I have a cash or a margin account?
You can check for this in the Settings under Account Type (Client Portal). Alternatively, check the buying power in the trading platforms. If it is larger than your available balance, you have a margin account.
When must I buy a stock (the latest) to become eligible for dividend payments?
The latest date to buy a stock and still be eligible for dividend payments is typically the business day before the ex-dividend date. The ex-dividend date marks the first day a stock trades without dividend rights. Dividend schedules can be viewed in TWS by right-clicking on the stock and selecting Dividend Schedule. This will provide you with the necessary details.
The record date signifies the deadline by which the buyer must be registered as a shareholder in order to qualify for dividends.
How do warrants and other structured products settle?
Warrants and structured products, such as certificates and knockouts, are generally settled in cash. The specific settlement terms are defined by the issuer and can be found in the Key Information Document (KID) for the product. These documents are available in Client Portal under Support.
To become eligible for dividends, what is the last date to exercise an option?
Under certain circumstances, the early exercise of an option contract might be economically beneficial. Therewith, an option holder receives the stock dividend and waives the remaining time value of the option contract. Clients are notified of upcoming dividends via TWS, Client Portal and by E-Mail, should an underlying stock of a hold option contract pay a dividend. Also, the economic impacts of early exercises or assignments are projected.
According to the EUREX exchange, stocks assigned from option contracts are settled within 2 business days.
The clearing instructions also specify that dividends are entitled to the owner of the option contract after exercising the option.
The exercise of an option contract one business day before the ex-date is sufficient to become eligible for a stock dividend!
Is it possible to trade options on a cash account?
Options and option combinations are generally tradable with a cash account. However, this is only possible for covered options though which require holding sufficient cash or the underlying asset. Otherwise, trading is limited to European-style options. In general, trading options on cash accounts is only possible for cash-settled options.
When should I close a futures position to avoid physical delivery?
Certain futures, especially commodity futures, may involve physical delivery. To avoid this, such positions are generally expected to be closed before the First Notice or First Position Date. More details and deadlines are provided in our partner’s Close-Out Policy: Futures Close Out | Interactive Brokers Ireland
When exactly do options settle?
Settlement of options differs between exchange and options style.
- EUREX: On expiry day, an auction takes place between 1 p.m. and 1.05 p.m. to determine the settlement price of all DAX options. Based on the opening price after the auction, the settlement price is to be determined and the options settle later that day.
- EUREX stock options: Stock options settle on the last trading day after trading close at 5.30 p.m.
- S&P 500 (SPX) options: The last trading day ends on the day prior to the option expiry. On the expiry day, the opening price of all SPX constituents is determined and used as the settlement price. It’s important to note that this method applies only to regularly expiring options, specifically those expiring on the 3rd Friday of the week.
- US stock options: Stocks options trade until the end of the last trading day and are settled thereafter.
Information about the settlement method is available on the trading platforms. More information about settlement and expiry of options can also be found on the exchange websites of EUREX and CBOE.
If I directly reinvest proceeds from a stock sale, will I borrow cash?
No, if the proceeds from a stock sale are reinvested on the same trading day, the settlement dates of the sale and the purchase typically align. This means that no borrowing occurs if the proceeds fully cover the purchase amount. Debit or credit interest is applied only to positive or negative balances after settlement.
How can I find settlement details for a specific product?
The settlement is explained in the contract details section. To access this information, right-click on the product and select Financial Instrument Info followed by Details.
This action will open a new webpage displaying the contract details for the selected product. The settlement specifications can be found in the Settlement Method section.
Where can I find more information about the settlement change in May 2024 (shift to T+1)?
There will be some limited impacts depending on the nature of your accounts. Via LYNX you can hold either a cash account or a margin account.
You can find more information on the shift to T+1 settlement cycle on the following page: Shift to T+1 settlement cycle
Currency Holidays and Settlement Timelines
Currency holidays affect settlement timelines. In general, most currencies settle on T+2 business days, while some pairs, such as CAD/USD, settle on Currency holidays affect settlement timelines. In general, most currencies settle on T+2 business days, while some pairs, such as CAD/USD, settle on T+1.
For settlement to take place, both central banks involved must be open. If either has a holiday, settlement is deferred to the next available business day. Intervening holidays may also shift the timeline further. For example, most FX trades do not settle on U.S. holidays, even when USD is not directly involved (e.g., EUR/JPY).
Traders should be aware that settlement delays can affect cash balances and financing costs. The Currency Settlement Holidays Calendar can be found here: Currency Settlement Holidays | Interactive Brokers Ireland
Example for EUR/USD:
- Trade from Tuesday, July 1st, settles on Thursday, July 3 (T+2).
- Trade from Wednesday, July 2nd, settles on Monday, July 7th. Since Friday, July 4th, is a bank holidays in USA followed by weekend days, settlement moves to Monday, July 7th.
- If on Monday there was a bank holidays in the Eurozone, settlement would move to Tuesday, July 8th.
More information can be found here.
The example above is for illustrative purposes only. Settlement dates can vary depending on product type, counterparties, and applicable regulations. Always verify the exact settlement timeline in your trading platform or with your broker.
Option Expiration: AM or PM
Every option contract has a specific expiration date and time. The time of expiration can be either in the morning (a.m.) or in the afternoon (p.m.).Options that expire at the close of the market are considered p.m. and options that expire the morning of the last trading day are a.m.
Example related to SPX Options on CBOE:
Every option contract specifies an expiration date and time. Expiration may occur in the morning (a.m.) or at the close of trading (p.m.).
- SPX AM Settlement: Trading stops at 3:15 p.m. CST on the day before settlement. Expiration occurs the following morning, when the official opening prices of the index components are used to determine the final settlement price. This timing difference can create a risk, as the settlement price may differ from the last trading price.
- SPXW PM Settlement: Trading continues until 3:00 p.m. CST on the expiration day, and settlement occurs immediately based on that closing price.
Thus, with AM settlement, there is a risk related to the fact that end of trading day is different than expiration day, meaning that the price related to the settlement will not be the one at end of trading day.
How to identify Options with AM/PM Settlement?
Each option contract has a defined expiration date and time. Expiration can occur either in the morning (AM) or in the afternoon (PM). By default, most options expire PM.
In TWS (Trader Workstation):
- Right-click on the option contract.
- Select Financial Instrument Info → Description.
- If the contract is AM-settled, you will see “AM” displayed in orange next to the expiration date. PM-settled options are the default, so this label is not shown.
In Option Chains (e.g., OptionTrader):
- AM-settled contracts are also marked with an orange “AM” next to the expiration date.
In the Mobile App:
- After selecting Options for a given ticker, you will see an overview of contracts.
- AM-settled options are indicated by “(AM)” next to the expiration date. PM-settled contracts are shown without any special label.
In LYNX+:
- Currently, LYNX+ does not directly display AM or PM settlement in the option overview.
- You can verify this by checking the difference between the last trading date/time and the expiration details.
Settlement style affects the timing of last tradable day and the determination of the final settlement price. Always verify settlement terms before trading an option contract.