Settlement
Settlement is a term used from multiple areas of business, finance and even the legal system. For the purpose of this discussion, the focus will be on settlement within the context of securities trading, foreign exchange and commodities.
In investment markets, settlement is the process by which a purchase or sale of securities is finalized, when a buyer and the seller (or their respective agents) exchange the amount of money and respective securities involved in the transaction. This most commonly happens after an order is placed, when trading is done electronically, or if the order is not considered immediate. In some financial transactions, settlement is done by delivery of physical assets, as opposed to money such as in the case of stock purchases, or foreign exchange transactions.
In this case, the agents of both the buyer and seller, or designated clearing houses (like the Depository Trust Company), settle the transaction on their respective sides and record the transaction in the books for both parties. Settlement usually occurs in three days for U.S. stock transactions and generally two business days for foreign transactions. Futures contracts are of exception, because normally the full value is settled shortly after the contract’s expiration.
The settlement process may involve additional agents, such as custodians who may oversee the transaction’s finalization and initiate the transfer of money from the buyer to the seller after the security has been delivered. Settlement also will culminate with the release of funds from an escrow account that has been set up to hold the money or other security in the transaction until the settlement process has been completed.
When it comes to commodities, settlement is the act of delivering and receiving physical goods or the act of making a cash payment. In this case, the sale of goods is completed by making the payment, which may be in the form of cash, credit, or third party payment such as a bank letter of credit. Alternatively, the goods are physically delivered, with the buyer taking custody and possession of them.
In the legal system, settlement refers to the negotiated agreement between two parties to resolve a dispute or lawsuit before the case goes to trial. During this process, the parties negotiate to reach an agreement and, if it is accepted by both parties, the dispute is resolved and the case is dismissed, avoiding the cost and time of further litigation.
Settlement is an important concept in business, finance, and law. It is important for both buyers and sellers to understand the full process to help ensure that all parties involved are able to conclude their trades and/or agreements timely and efficiently.
