What is a 'Settlement Date'
The settlement date is the date on which a trade must be settled and the buyer must make payment. It is also the payment date of benefits from a life insurance policy. The settlement date for stocks and bonds is usually three business days after the trade was executed; for government securities and options, it's the next business day; and in spot foreign exchange it is two business days after the transaction date.
BREAKING DOWN 'Settlement Date'
The financial markets specify the number of business days after the transaction date that the security or financial instrument will be delivered and must be paid for. The lag between transaction and settlement dates reflects the fact that settlement, which now takes place electronically, was previously done by physical delivery.
Most stocks and bonds are settled three business days after the transaction takes place, which is referred to as T+3. Government bills, bonds and options are settled the next business day. Spot foreign exchange transactions usually settle two business days after execution; the main exception is the U.S. dollar vs. the Canadian dollar, which settles the next business day.
Weekends and holidays can cause the time between transaction and settlement dates to increase substantially, especially during the Christmas and Easter seasons. Foreign exchange market practice requires that the settlement date be a valid business day in both countries.
Forward foreign exchange transactions settle on any business day that is past the spot value date. There is no absolute limit in the market to restrict how far in the future a forward can settle, but credit lines are often limited to one year.
Both parties to a transaction take on credit risk because of the time that expires between the execution of a transaction and its settlement. This is especially important in forward foreign exchange transactions, given the length of time that can pass and the volatility in the market. There is also settlement risk because the currencies are not paid and received simultaneously, and time zone differences increase that risk.
Life insurance is paid following the death of the insured, unless the policy has been surrendered before that. If there is a single beneficiary, payment is usually within two weeks from when the death certificate is provided. It can take longer if there are multiple beneficiaries who must be contacted, but most states require the payment of significant interest if there is a delay.