Funds Settlement

Written by:
Image
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades.

Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

View all posts
Updated August 5, 2020

What is Funds Settlement?

Funds settlement refers to the transfer of funds from buyer to seller and the transfer of an asset's title from seller to buyer.

How Does Funds Settlement Work?

When an investor sends an order to his or her broker, that trade information is sent to a clearinghouse (for example, the National Securities Clearing Corporation). The clearinghouse processes and records the trade, and then issues a report to the broker/dealers involved that includes their net securities positions and the money to be settled among the parties.

The NSCC forwards settlement instructions to the Depository Trust & Clearing Corporation (DTCC), asking it to electronically transfers the ownership of the securities from the selling broker's account to the buying broker's account. The DTCC also transfers funds from the buying broker's bank account to the selling broker's bank account.

The brokerages then adjust their clients' accounts accordingly. The process is similar for institutional investors. For most stock trades, this takes three business days to occur. For option trades, fund settlement usually takes one business day.

Funds settlement also occurs for dividend payments. Foreign markets may have different settlement procedures or times to completion.

Why Does Funds Settlement Matter?

Funds settlement is an important "back-office" function, and the faster it occurs, the more it reduces market risk by ensuring that trades are executed properly. Fast funds settlement also increases investor confidence in the markets by ensuring that their trades are completed on time and that they won't lose their funds to bankrupt brokerage firms or intermediaries. It also requires participants to have the money in their accounts as their trades are made (or arrange for credit before the trade is placed).

Ask an Expert about Funds Settlement
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Funds Settlement.
Be the first to ask a question

If you have a question about Funds Settlement, then please ask Paul.

Ask a question

Read this next

Don't Know a Financial Term?
Search our library of 4,000+ terms
 - profile
Ask an Expert about Funds Settlement

By submitting this form you agree with our Privacy Policy

Share
close