Settlement (of securities) is the process whereby securities or interests in securities are delivered, usually against payment, to fulfill contractual obligations, such as those arising under securities trades.
This involves the delivery of securities to perform contractual delivery obligations. It usually also involves the corresponding payment of a purchase price. Usually settlement is preceded by trading, which involves entering into contracts of sale and purchase.
Although settlement is generally becoming quicker, in most markets a number of business days still elapse between trading and settlement (the settlement date). The settlement date for marketable stocks is usually three business days after the trade was executed and for listed options and government securities it is usually one day. A number of risks arise for the parties during the settlement interval, which are managed by the process of clearing, which follows trading and precedes settlement. Clearing involves modifying those contractual obligations so as to facilitate settlement, often by netting and novation.
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