From a trade to owning the shares
When a trade executes on an exchange it is only a promise: one side will deliver shares, the other will pay cash. Settlement is the moment the promise is fulfilled and ownership and cash actually change hands. Between execution and settlement comes clearing. In US stocks the trade date is called T, and since 28 May 2024 settlement happens one business day later (T+1); before that it was T+2, and many other markets still use T+2.
Clearing is done by a central counterparty (CCP). Through novation the CCP becomes the buyer to every seller and the seller to every buyer, so participants face the CCP instead of each other. It also nets positions: if you buy and sell the same stock in a day, only the difference has to settle. In US stocks the CCP is NSCC and the depository that moves the shares is DTC; listed options are cleared by the OCC, and futures by the exchange's own clearing house.
Settlement uses delivery versus payment (DVP): shares and cash move at the same moment, so neither side is ever exposed on its own. If a seller cannot deliver, the trade fails, which costs money and can trigger forced buy-ins.
- Trade date (T): the day the trade executes.
- Settlement date: when shares and cash actually change hands (T+1 in US stocks).
- CCP and novation: the clearing house steps between buyer and seller.
- Netting: offsetting buys and sells so only the difference settles.
- DVP: delivery versus payment, shares and cash move together.
Lab · what's graded
- After the trade20 pts
- Who does what20 pts
- A Wednesday trade10 pts
- A Friday trade10 pts
- Netting20 pts
- What a CCP does20 pts