Settlement
The settlement, in financial transactions, refers to the finalization of financial obligations between a buyer and a seller. It involves the payment and delivery of the agreed-upon financial instrument on the spot or derivative market. The successful settlement ensures the transfer of ownership and fulfillment of contractual obligations.
Definition: Settlement and Clearing
Historically, the settlement period provided counterparts with time to fulfill their delivery obligations from a completed transaction, which involved the exchange of cash for securities. During this period, the transfer of ownership rights to the securities had to take place, along with payment of their purchase price. In the past, funds were transferred via wire transfer, and securities were physically delivered. As a result, payment and delivery of securities had to be completed within two business days.
Although you gain immediate ownership rights to stocks upon purchase, official ownership is obtained only after settlement, which occurs after two days.
Currently, transactions involving securities, currencies, and derivatives are cleared by central counterparts known as clearinghouses. The clearinghouse acts as an intermediary between the buyer and seller, minimizing the risk of failure in delivering funds or securities. Transactions between buyers and sellers are recorded and subsequently settled through the clearing system.
Overview of settlements by product
The settlement of transactions follows specific time frames that vary depending on the type of financial product. For instance, stocks, ETFs, and warrants typically have a settlement period of two business days (referred to as T+2), while options and futures contracts settle within one business day (T+1). It’s important to note that settlement may be affected by public holidays, causing transactions in certain currencies to be rescheduled. If a settlement date falls on a public holiday, it is moved to the next available business day.
Please refer to the table on the right for a comprehensive overview of the most common settlement periods:
| Asset class | Settlement period |
|---|---|
| Stocks/ETPs/ADRs | T+2 |
| 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 |
Settlement period: Stocks and Forex
Cash account: trading stocks in foreign currencies
In the context of trading stocks denominated in foreign currencies, the settlement period holds significant importance. To purchase shares in a currency that you do not hold in your trading account, you first need to make a currency conversion into that currency. Generally, the settlement period for the purchase of shares and the currency conversion is the same, it is usually possible to purchase shares immediately after the currency conversion.
Reinvestment of funds from the selling shares on margin account
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).
Reinvestment of funds from the selling shares on margin account
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).
Suppose you sell stock on Monday, the funds from that sale are settled on Wednesday. If you promptly invest these funds in other shares, 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).
Settlement period: Options and Forex
Cash Account: Options Trading in Foreign Currencies
Options trades typically have a settlement period of one business day. Unlike buying stocks, options cannot be traded immediately after the currency conversion is completed. In this case, you would need to wait for one business day to submit an option order.
Margin account
If an option is traded without holding funds in the quoted currency, the amount in that currency is therefore borrowed for one trading day. Please be aware of the debit interest to be accrued!
Futures
Futures contracts are settled on the day following the trading day (T+1). Therefore, if you buy a futures contract today, you are obligated to make the payment by the next business day. Similarly, the counterpart must deliver the underlying asset by the next business day as well.
Futures open their expiry
Upon their expiry, futures contracts are settled on a specific date. Depending on the contract, futures are either settled in cash or through physical delivery. Physical delivery involves the transportation of the specified product from the seller to the buyer. Due to the varying quality of the underlying asset, such as bonds or commodities like gold or wheat, it is the responsibility of the delivering party to determine the exact specifications of the product. However, via LYNX, physical delivery is generally not allowed. To avoid settlement claims, it is mandatory to close your future positions before the expiry date.
- First Position Date: The first date on which the seller might inform the clearing system of a delivery intent.
- First Notice Date: The first date on which a buyer might be informed of a possible delivery by the clearing system.
Futures settlement overview
The table below displays both the First Notice Date and First Position Date for specific futures contracts. You need to close your futures position two days before the Cutoff date.
- Long Futures Cutoff: The date on which long futures positions need to be closed and settled.
- Short Futures Cutoff: The date on which short futures positions need to be closed and settled.
| Exchange | Trading Class | Contract Month | Description | Start of Close-Out Period | Long Futures Cutoff | Long Futures Liquidation | Short Futures Cutoff | Short Futures Liquidation |
|---|---|---|---|---|---|---|---|---|
| CBOT | 10Y | 202311 | 10-year Micro Yield | 2 business days prior to cutoff | 2023/11/30 14:00 | 2023/11/29 7:20 | 2023/11/30 14:00 | 2023/11/29 7:20 |
| CBOT | 10Y | 202312 | 10-year Micro Yield | 2 business days prior to cutoff | 2023/12/29 14:00 | 2023/12/28 7:20 | 2023/12/29 14:00 | 2023/12/28 7:20 |
| CBOT | 2YY | 202311 | 2-year Micro Yield | 2 business days prior to cutoff | 2023/11/30 14:00 | 2023/11/29 7:20 | 2023/11/30 14:00 | 2023/11/29 7:20 |
| CBOT | 2YY | 202312 | 2-year Micro Yield | 2 business days prior to cutoff | 2023/12/29 14:00 | 2023/12/28 7:20 | 2023/12/29 14:00 | 2023/12/28 7:20 |
| CBOT | 30Y | 202311 | 30-year Micro Yield | 2 business days prior to cutoff | 2023/11/30 14:00 | 2023/11/29 7:20 | 2023/11/30 14:00 | 2023/11/29 7:20 |
| CBOT | 30Y | 202312 | 30-year Micro Yield | 2 business days prior to cutoff | 2023/12/29 14:00 | 2023/12/28 7:20 | 2023/12/29 14:00 | 2023/12/28 7:20 |
| CBOT | 5YY | 202311 | 5-year Micro Yield | 2 business days prior to cutoff | 2023/11/30 14:00 | 2023/11/29 7:20 | 2023/11/30 14:00 | 2023/11/29 7:20 |
| CBOT | 5YY | 202312 | 5-year Micro Yield | 2 business days prior to cutoff | 2023/12/29 14:00 | 2023/12/28 7:20 | 2023/12/29 14:00 | 2023/12/28 7:20 |
| CBOT | EH | 202311 | Ethanol | 2 business days prior to cutoff | 2023/10/30 15:00 | 2023/10/27 8:30 | 2023/11/03 12:01 | 2023/11/02 8:30 |
| CBOT | EH | 202312 | Ethanol | 2 business days prior to cutoff | 2023/11/29 15:00 | 2023/11/28 8:30 | 2023/12/05 12:01 | 2023/12/04 8:30 |
FAQ
The last day to become eligible for dividend payments is the business day before the ex-date.
Why? The ex-date marks the first day on which a stock is traded without the right to obtain a dividend. To access information regarding dividend ex-dates, you can follow these steps on the TWS trading platform: Right-click on the name of the stock and choose 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.
Warrants and structured products, such as certificates and knockouts, are typically settled in cash. The settlement details are specified by the issuer of the product. More details can be found in the Key Information Document (KID) of the particular product. These documents can be accessed through the Client Portal by selecting the Support menu.
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!
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.
Especially commodity futures bear a risk of a possible physical delivery of the underlying. Hence, such a position must be closed and settled before the first position or first notice date. The following tables contain the most common deadlines for closing out future positions:
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.
No, if proceeds from e.g. a stock sale are reinvested the same trading day, the payment for the stock is still due two business days later. This matches with the settlement of your sale proceeds. If the proceeds cover the purchasing amount of the new stock, no cash is borrowed and therefore no interest will accrue.
Interest is only accrued for positive or negative cash balances at the end of each trading day.
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.