What is Settlement Date
The settlement date is the date when a trade is final, 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 two business days after the execution date. For government securities and options, it's the next business day. In spot foreign exchange (FX), the date is two business days after the transaction date.
BREAKING DOWN Settlement Date
The financial market specifies the number of business days after a transaction that a security or financial instrument must be paid and delivered. This lag between transaction and settlement dates follows how settlements were previously confirmed, by physical delivery. Today, using modern technology, a transaction is electronically processed.
Most stocks and bonds settle within two business days after the transaction date. This two-day window is called the T+2. Government bills, bonds, and options settle the next business day. 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 settles the next business day.
Weekends and holidays can cause the time between transaction and settlement dates to increase substantially, especially during holiday seasons (e.g., Christmas, Easter, et al.). 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 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.
Settlement Date Risks
The elapsed time between the transaction and settlement dates exposes transacting parties to credit risk. Credit risk is especially significant in forward foreign exchange transactions, due to 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. Furthermore, time zone differences increase that risk.
Life Insurance Settlement Date
Life insurance is paid following the death of the insured unless the policy has already been surrendered or cashed out. If there is a single beneficiary, payment is usually within two weeks from the date the insurer receives a death certificate. Payment to multiple beneficiaries can take longer due to delays in contact and general processing. Most states require the insurer pay interest if there is a significant delay in settling the policy.