Settlement

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, ownership rights to the securities were transferred, and the purchase price was paid. 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. These clearinghouses act as intermediaries 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 might seem like an instant process. But there are actually two important dates involved in any trade that you should know and understand:

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.

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:

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 convert your funds 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.

However, there is an exception for U.S., Canadian, and Mexican stocks. These stocks have a settlement period of one business day (T+1), so you will need to convert the required currency one day before the purchase. This ensures that the settlement of the Forex transaction (T+2) coincides with the settlement of the U.S., 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. 

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.

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.

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 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.

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.

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.