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 generally after one or 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.

Making a trade may feel like an instant process. But there are actually two important dates involved in any trade that you should know and understand:

Transaction date:

The transaction date is the day you successfully execute a trade.

Settlement date:

The settlement date is when that trade becomes official.

The settlement date is the date when payment is due for purchases, when securities sold must be delivered, and the security’s transfer agent has verified the new shareholder and removed the former one.

When you buy or sell securities, settlement refers to the official transfer of securities to the buyer’s account and the cash to seller’s account.

Overview of settlement periods by product

The settlement of transactions follows specific time frames that vary depending on the type of financial product. For instance, stocks (except US, Canadian and Mexican stocks), ETFs, and warrants typically have a settlement period of two business days (referred to as T+2), whereas US, Canadian, and Mexican stocks, as well as options and futures contracts, settle within one business day (T+1). It is important to note that settlement may be affected by public holidays, resulting in transactions in certain currencies being rescheduled. If a settlement date falls on a public holiday, it is moved to the next available business day.


Please refer to the table below for a comprehensive overview of the most common settlement periods:

Asset classSettlement period
Stocks/ETPs/ADRs (Except US, Canadian and Mexican Stocks)T+2
US, Canadian & Mexican Stocks/ETPsT+1
Stock Options (Equity Options)T+1
Index OptionsT+1
FuturesT+1
FOPs (Future Options)T+1
ForexT+2
BondsUsually T+2, US Treasuries T+1
CFDsSame as Underlying
Metals (XAUUSD, XAGUSD)T+2
Warrants/Structured ProductsT+2
Please note: There can be deviations in this list due to changes in settlement periods in May 2024
Information
CHange in Settlement cycle

Since May 2024, the settlement period for US, Canadian and Mexican stocks & other financial products has been reduced from two business days (T+2) to one business day (T+1). There will be some limited impacts depending on the nature of your accounts.

You can find more information here: Shift to T+1 settlement cycle

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 stocks in a currency not held in your trading account, you first need to make a currency conversion into that currency. Generally, the settlement period for the purchase of stocks and the currency conversion is the same, it is usually possible to purchase stocks immediately after the currency conversion.

US, Canadian and Mexican stocks are an exception. With a settlement period of one business day (T+1) you will need to convert the needed currency 1 day before the purchase so the settlement of the Forex Transaction (T+2) will coincide with the settlement of the US, Canadian or Mexican Stock Transaction (T+1).

With a cash account, it is important to track these settlement days. For example, your trades may need to be fully settled in a product before you can execute another trade in the same product. This way, you avoid the settlement of both transactions overlapping. 

Margin account: Reinvestment of funds from selling stocks

Suppose you sell stock on Monday, the funds from that sale 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 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.

Settlement period: 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 on 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

For more information about the Close-Out Policy of Futures, please visit the page of our partner:
Futures Close Out | Interactive Brokers Ireland

The table on this page 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.

FAQ

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.

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. For more information about the Close-Out Policy and deadlines of Futures, please visit the page of our partner: Futures Close Out | Interactive Brokers Ireland

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.

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

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