Trade Settlement and Reporting
Trade settlement is the process of exchanging securities for payment. Understanding settlement cycles and reporting requirements is essential for Series 7 representatives.
Settlement Cycles
Regular Way Settlement
Regular way settlement is the standard settlement for most securities:
| Security Type | Settlement |
|---|---|
| Corporate stocks | T+1 (trade date + 1 business day) |
| Corporate bonds | T+1 |
| Municipal bonds | T+1 |
| U.S. Government securities | T+1 |
| Options | T+1 |
| Mutual funds | T+1 |
Key Point: As of May 28, 2024, regular way settlement moved from T+2 to T+1 for most securities.
Alternative Settlement Options
| Settlement Type | When Settlement Occurs |
|---|---|
| Cash Settlement | Same day (trade date) |
| Seller's Option | Seller chooses date (min. T+2) |
| Buyer's Option | Buyer chooses date |
| When Issued | When security actually issued |
Cash Settlement
Cash settlement requires same-day delivery and payment:
- Used when immediate delivery is necessary
- Price may be adjusted to reflect urgency
- Both parties must agree
- Common for dividend plays around ex-date
Seller's Option
Seller's option contracts give the seller flexibility on delivery date:
- Minimum: T+2 (must be longer than regular way)
- Maximum: Up to 60 days
- Seller must give buyer one business day notice before delivery
Ex-Dividend and Record Dates
The settlement cycle affects dividend entitlement:
| Date | Description |
|---|---|
| Declaration Date | Board announces dividend |
| Ex-Dividend Date | First day stock trades without dividend |
| Record Date | Date company checks ownership |
| Payment Date | Date dividend is paid |
Ex-Dividend Date Timing
With T+1 settlement, the ex-dividend date is one business day before the record date.
Example: Record date is Thursday. Ex-date is Wednesday.
- Buy Tuesday (before ex-date) → Settles Wednesday → On record → GET dividend
- Buy Wednesday (ex-date) → Settles Thursday → NOT on record → NO dividend
Trade Confirmation Requirements
Broker-dealers must send customers written confirmations for each transaction:
Required Information
| Item | Description |
|---|---|
| Trade Date | Date the trade was executed |
| Settlement Date | Date payment/delivery is due |
| Security Description | Name, CUSIP, quantity |
| Price | Per unit and total |
| Commission | If acting as agent |
| Markup/Markdown | If acting as principal (on request) |
| Capacity | Agent or principal |
Confirmation Timing
- Must be sent at or before completion of the transaction (settlement date)
- In practice, usually sent on T+1
Trade Reporting Systems
TRACE (Trade Reporting and Compliance Engine)
TRACE is FINRA's system for reporting corporate bond transactions:
| Feature | Requirement |
|---|---|
| Coverage | Investment-grade and high-yield corporate bonds |
| Reporting Time | Within 15 minutes of execution |
| Purpose | Price transparency in bond markets |
| Access | Real-time data available to public |
EMMA (Electronic Municipal Market Access)
EMMA is the MSRB's system for municipal securities information:
| Feature | Description |
|---|---|
| Operated By | Municipal Securities Rulemaking Board (MSRB) |
| Coverage | Municipal bonds |
| Information | Trade data, official statements, continuing disclosures |
| Public Access | Free access at emma.msrb.org |
Consolidated Tape
The Consolidated Tape System reports trades in listed equity securities:
- Tape A: NYSE-listed securities
- Tape B: Regional exchange and AMEX securities
- Tape C: NASDAQ securities
Clearing and Settlement Infrastructure
NSCC (National Securities Clearing Corporation)
NSCC provides clearing and settlement for equities and corporate bonds:
- Clears trades between broker-dealers
- Acts as central counterparty (guarantees settlement)
- Provides netting to reduce settlement obligations
- Subsidiary of DTCC
DTC (Depository Trust Company)
DTC holds securities in electronic form:
- Book-entry ownership (no physical certificates)
- Facilitates transfers between members
- Holds most U.S. securities
- Subsidiary of DTCC
How Settlement Works
- Trade execution — Buyer and seller agree on terms
- Trade comparison — Details matched and confirmed
- Clearing — NSCC calculates net obligations
- Settlement — DTC transfers securities, Fed wires transfer funds
Failed Trades
A failed trade occurs when one party doesn't deliver securities or payment by settlement date:
Consequences of Fails
| Party | Consequence |
|---|---|
| Seller fails | Buyer may execute a "buy-in" |
| Buyer fails | Seller may execute a "sell-out" |
Buy-In Process
If a seller fails to deliver:
- Buyer gives notice to seller
- After notice period, buyer purchases securities elsewhere
- Original seller liable for any price difference
On the Exam
The Series 7 exam frequently tests:
- Regular way settlement periods (T+1)
- Ex-dividend date relationship to record date
- Trade confirmation requirements
- TRACE and EMMA reporting systems
- Difference between NSCC and DTC functions
What is the regular way settlement period for corporate stock trades?
TRACE is used to report transactions in which type of security?
The record date for a cash dividend is Thursday. What is the ex-dividend date?
Which organization holds securities in electronic book-entry form and facilitates transfers between broker-dealers?
11.5 Market Participants
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