Settlement Cycle

Key Highlights

• The settlement cycle refers to the time frame between the execution of a trade and the actual transfer of securities to the buyer and funds to the seller.

• Types of settlement cycles includes T+1, T+2 and real-time settlement.

What is Settlement Cycle?

The Settlement Cycle refers to the time frame between the execution of a trade and the actual transfer of securities to the buyer and funds to the seller. It represents the final step of the trading process, ensuring that both parties fulfil their obligations. In India, most equity trades follow a T+1 settlement cycle, meaning settlement occurs one business day after the trade date.

A well-functioning settlement cycle enhances market efficiency, reduces counterparty risk, and ensures smooth transaction flow for investors.

How the Settlement Cycle Works?

1. Trade Execution (T Day): Buy/sell order is placed and matched on the exchange.

2. Clearing: The clearing corporation verifies the trade, determines obligations, and ensures both parties have adequate funds or securities.

3. Settlement (T+1): Securities are credited to the buyer’s demat account, and funds are transferred to the seller’s bank account.

Types of Settlement Cycles

1. T+1 Settlement: The current standard for Indian equity markets where trades are settled the next working day.

2. T+2 or Longer Settlements: Used historically or in some global markets; typically applied to certain debt, international securities, or special situations.

3. Real-Time Settlement (Emerging Trend): Instant settlement systems are being explored globally as market infrastructure evolves.

Key Participants in the Settlement Cycle

• Stock Exchanges: Facilitate trade execution.

• Clearing Corporations: Guarantee trade completion and manage counterparty risk.

• Depositories (NSDL/CDSL): Hold and transfer securities in electronic form.

• Clearing Members / Brokers: Act on behalf of investors to ensure settlement obligations are met.

Benefits for Investors

• Faster access to funds or securities.

• Lower counterparty and settlement risk.

• Improved liquidity and cash-flow planning.

• Enhanced transparency due to regulated clearing mechanisms.

Risks & Considerations

• Operational delays during system outages or bank holidays.

• Fund/securities shortages may lead to penalties or auction processes.

• Cross-border trades can have longer cycles due to differing regulations.

FAQs

1. What does T+1 mean?

T+1 means the trade is settled one business day after the transaction date (T). If you buy shares today, they are typically credited to your demat account on the next working day.

2. When do I receive money after selling shares?

In a T+1 cycle, funds are usually credited to your linked bank account the day after the sale is executed.

3. Why is settlement important?

It ensures the legal transfer of securities and funds, completing the trade and reducing counterparty risk.

4. Can settlement get delayed?

Yes. Settlement may be impacted by bank holidays, technical glitches, or shortages of funds/securities on the buyer or seller side.

5. Does the settlement cycle differ for other asset classes?

Yes. Debt instruments, mutual funds, and international equities may have different settlement timelines depending on market regulations.

6. Can the buyer trade the securities before settlement?

No. Securities can only be sold after they are credited to the investor’s demat account.