SETTLEMENT OF SECURITIES

Settlement of a security transaction refers to the process of exchanging securities and cash between the buyer and seller in order to discharge their respective obligations.A trade can not be deemed to be settled until both the securities transfer and cash transfer are final and irrevocable.Nowadays, transfer takes place electronically by book entry rather than physical movement of certificates.

Settlements Concepts:
To minimize the principal risk incurred in the case of default by either counter party, leading securities regulators and central banks recommended that settlement providers should reduce to a minimum the credit risk created, if securities and cash are delivered without receipt of assets of the corresponding value of the counter party.Some settlement concepts which help us understand the different ways of settling the trades in real world.

*Free of Payment (FoP) Settlement- It refers to the separate, non-simultaneous exchange of cash and securities between counter parties.Under this settlement one or both parties in the trade will be forced to deliver securities or pay cash before they have taken delivery of the corresponding asset from the other counter party.

*Delivery versus Payment (DvP)  Settlement- It is a procedure where, appropriate technical, legal and contractual arrangements are in place to ensure that a transfer of securities is final if, and only if, the corresponding transfer of funds is final.DvP involves simultaneous exchange of securities and cash between buyer and seller, which in real world are done by their respective custodians and settlement agents.Here, both parties are protected against risk of counter party default.

*Netted Settlements- These could be bilateral i.e. between two parties only or multilateral through a CCP.In bilateral settlement, trades between the same two counter parties in the same security are offset, so that there is only one transfer EOD.But, multilateral settlements extend bilateral netting to cover all the trades in the same security by any number of counter parties.

*Trade Date Netting and Continuous Net Settlement- In trade date netting, each trading company will settle a single netted cash balance and a single netted securities balance calculated at close of business on trade date.This settlement relates only to trades flagged or netting on the trading day, and will not include failed trades from previous days that have been brought forward.
In continuous net settlement (CNS), failed trades from previous days could be represented for netting in a later multilateral netting cycle.

*Fixed Date Settlement and Rolling Settlement- In fixed date settlement, trades executed within a specified period i.e. an account period would settle on a specified date. e.g. all trades executed during the week beginning Monday,9th May would settle on Monday, 16th may; all trades beginning Monday, 16th May would settle on Monday, 23rd May, and so on.
Rolling settlement occurs on a specific number of business days after the trade date, rather than at the end of an account period, thereby limiting the number of outstanding trades and reducing aggregate market exposure.Most of the countries have now adopted rolling settlement.

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