Series 7

AAA

Securities Transactions - Settling Transactions In The Secondary Market

In the secondary market, securities transactions can be settled in other ways:

  • Regular-way (RW) trades settle on the third business day after the transaction. That is, if you buy a stock for a client on a Tuesday, you must have the cash to pay for it by Friday; similarly, the investor selling the stock must have it ready for good delivery by that Friday.

  • Ex-dividend trades relate to stocks upon which a dividend has been declared but not yet distributed. When an investor buys on and after the ex-dividend date, or ex-date, he is not entitled to receive the dividend, and the terms of the trade are said to be ex-dividend. For most dividends, the ex-date is two business days before the record date, the day on which the company's transfer agent compiles a list of those persons with shares registered in their names. Notice of the declaration of a dividend must be received at least 10 calendar days prior to the record date. The payable date is the day on which the distribution will be mailed or electronically credited to the registered holders.


A timeline of the various dates looks like this:



Bear in mind that this timeline refers to business days. Weekends and exchange holidays are excluded.

  • Ex-rights trades are similar to ex-dividend trades, except the distribution under consideration is the right to buy additional stock at a discount, rather than a dividend.

  • Due bill trades are used to bridge ex-dates. Suppose you buy a stock for your client seven days after the dividend is declared, and both you and the seller intend for the dividend payment to trade along with the stock. By the time the trade settles, though, the ex-date will have come and gone, and the dividend check is going to be mailed to the seller, not to your client. The easiest way to solve this is to have the seller send you a due bill, a type of promissory note, for the amount of the dividend. Alternately, the seller could send a due bill check, which is an actual cash-equivalent bank draft.

In a cash trade, delivery occurs on the day of the trade. At the seller's option, the parties can take anywhere from three to 60 business days to deliver.

Settlement Rules
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