What is Trade Settlement Process?

Trade settlement is the transfer of securities and payments between buyers and sellers after a trade is completed. In the Indian stock market, this procedure follows a T+1,  settlement cycle, which means stocks are delivered and cash are received one day following the trade. Essentially, on the settlement date, ownership of financial instruments passes from the seller to the buyer, and payment is paid correspondingly. In this blog, we’ll cover everything you need to know about what trade settlement means and dive into the various ways stocks are settled.

Types of Settlement in Stock Market

In the stock market, settlements come in several forms. Settlement is the last stage of a trade order and falls into one of the following categories:

1. Spot Settlement: This type of settlement enables a deal to occur right after the T+2 rolling settlement principle.

2. Forward Settlement: A deal on T+5 or T+7 in the future may be settled via a forward settlement.

What is Rolling Settlement?

Usually, a rolling settlement takes T + 2 days. Let's examine a settlement case for T + 2. If there is no holiday and the markets are open from Monday through Wednesday, a buy order placed on Monday will result in the shares being credited to your account by Wednesday. Similarly, purchasing stock on Friday allows the shares to be credited to your account on Tuesday of the following week.

Rolling Settlement Rules in BSE

1. All equity sector securities on the Bombay Stock Exchange (BSE) are settled in a time frame of two days plus one.
2. Retail investors' fixed income and government securities are paid in T+2 days as well.
3. All financial and security payments must be made on the same day.
4. After the BSE has finished paying out the cash and securities, the customer must deliver the securities and pay within one working day.

What is the Settlement Date?

The completion of the trade settlement and the transfer of ownership of the securities from the seller to the buyer occurs on the settlement date. It is the day the securities are delivered, and the cash is paid. T+1 is the deadline for completing the securities and fund pay-in and pay-out settlement period. The number indicates the number of days between the trade date and the settlement date, while the T stands for "transaction." For example, T+1 settlement denotes a settlement that takes place one business day following the trade date.

What is the Trade Settlement Process on BSE?

The rolling settlement system serves as the foundation for the trade settlement procedure on the Bombay Stock Exchange (BSE). Trades are resolved on the BSE within one business day of the trading date, according to the T+1 settlement period. There are several phases to the trade settlement cycle. Trade date, pay-in, and pay-out are a few of them. The sellers get paid for the securities they have sold during the pay-out phase, and the purchasers must pay the money for the securities they bought during the pay-in phase.

What is Trade Settlement in the NSE?

The BSE and the National Stock Exchange (NSE) use comparable trade settlement procedures. T+1 is the NSE's settlement term as well. Five steps make up the NSE settlement cycle: transaction date, trade confirmation, pay-in, pay-out, and closeout. The sellers get paid for the securities they have sold during the pay-out phase, and the purchasers are required to pay the money for the securities they have bought during the pay-in phase.

Settlement Violations

Settlement violations are situations in which an investor's account contains inadequate settled funds after completing a deal. If, on the settlement date, an investor fails to provide the necessary amounts, the brokerage business settles the contract. If an investor experiences a loss in security value, the brokerage firm has the right to liquidate their assets and impose penalties. The brokerage may impose additional fees or interest in addition to the penalty.

Conclusion
The final part that completes a transaction is trade settlement, whether intraday trading or other, the settlement procedure takes place on the settlement day, denoted by T+2, which is the number of days separating the trade date and the settlement date. Rolling settlement systems, such as those used in the BSE and NSE, ensure prompt transaction completion within designated working days. Investors should take note of settlement dates, since failure to do so may result in fines and asset liquidation. You can check the settlement status from your trading app & get updates from your brokerage firm. Insufficient money might cause settlement breaches.