What is a Regular-Way Trade (RW)?
A regular-way trade (RW) is settled within the standard settlement cycle, which, depending on the transaction type, can range from one to five days.
- A regular-way trade (RW) is settled within the standard settlement cycle, which, depending on the transaction type, can range from one to five days.
- The settlement cycle is a defined period, preset by regulators of that market, for the buyer to complete payment or for the seller to deliver the assets traded.
- The Securities and Exchange Commission (SEC), in 2017, approved a new, and shorter, settlement rule for equities called "T+2."
Understanding a Regular-Way Trade (RW)
A regular-way trade (RW) has the typical and defined settlement cycle required for that particular asset. In contrast, a non-regular settlement would have a shorter or longer settlement cycle, allowing for a quicker, or delayed, transfer of funds and the asset between the seller and the buyer.
The settlement cycle is a defined period, preset by regulators of that market, for the buyer to complete payment or for the seller to deliver the assets traded. The settlement cycle differs for different assets. Most trades are regular-way trades.
The reason for the settlement period time lag from a trader to a settlement is to allow both parties to gather the needed resources to complete the transaction. When working with different currencies, it could take time for funds deposited in the buyer's account to become available for disbursement. Likewise for physical certificates or assets needed to move from the seller to the middle or clearing agent.
Changes in technology and digital recording could allow for faster, if not instant, settlement of both funds and assets. It would also reduce credit, market, and liquidity risk. However, it takes time to change such procedures, even if the desire to do so is there.
As a first step, in 2017, the Securities and Exchange Commission (SEC) approved a new, and shorter, settlement rule called "T+2." Securities transactions in the U.S. now "trade plus two" days, instead of three days. This change was in direct acknowledgment of the improvements in technology and a trading environment that makes shorter settlements both feasible and valuable to all market participants.
Settlement by Asset Class
Equities trading got the most significant boost from T+2 as settlements were typically three days. However, other asset classes already settle in two days and some resolve in one day, also known as next day. Weekends and holidays can cause the time between transaction and settlement dates to increase substantially, especially during holiday seasons like Christmas, Easter, and others.
Here are the settlement cycles for some popular assets that, if adhered to, would fall under a regular-way trade (RW).
- Equities settle T+2.
- Government bills, bonds, and options settle T+1.
- Spot foreign exchange transactions usually settle two business days after the execution date. A primary exception is the U.S. dollar vs. the Canadian dollar, which resolves the next business day. The foreign exchange market requires that the settlement date be a valid business day in both countries.
- Forward foreign exchange transactions settle on any business day that is beyond the spot value date. There is no absolute limit in the market to restrict how far in the future a forward exchange transaction can settle, but credit lines are often limited to one year.