What is a renewable agreement?
A continuous settlement is the process of settling securities transactions on successive dates based on the specific date on which the original transaction was performed, so that transactions executed today have a settlement date one business day after the transactions executed. Yesterday.
This is in contrast to settlement of accounts, in which all trades are settled once in a specified period of days, regardless of when the trade took place. Trade settlement refers to when the security is delivered after the trade is executed.
- Continuous settlement is the clearing of trades over a predetermined series of days.
- The idea is to allow trades to hit an investor or trader’s account shortly after they occur, rather than waiting for a specific day each month (i.e. account settlement).
- Most shares are settled continuously based on the second business day after execution (T + 2).
Understanding mobile settlement
Securities sold on the secondary market are typically settled two business days after the initial trading date. So if some stocks within a portfolio are sold on Wednesday, these trades will be settled on Friday if there are no public holidays in the market. Likewise, the shares of the same portfolio that are sold on Thursday would be liquidated the following Monday if there are no holidays, etc.
When securities are sold and settled on successive business days, they are said to be undergoing continuous settlement. On the contrary, investors who participate in the settlement of accounts will see all trades carried out within a defined period of time, settling on the same day.
For example, if an institution settles all trades that take place from the 1st to the 15th of the month on the 16th of the month, all investors who traded during that period will see their settlements on the same day. An investor who has purchased a security will not receive the security in his account and will officially own that security until the trade has been settled.
In 1975, Congress enacted Section 17A of the Securities Exchange Act of 1934, which directed the Securities and Exchange Commission (SEC) to establish a national clearing and settlement system to facilitate securities transactions. Therefore, the SEC created rules to govern the securities trading process, which included the concept of the settlement cycle.
The SEC also determined the actual length of the settlement period. Originally, the settlement period gave both the buyer and the seller time to do whatever was necessary, which used to mean handing over stock certificates or cash in hand to the respective broker, to fulfill their part of the exchange.
Today, money is transferred instantly, but the settlement period remains in effect, both as a rule and for the convenience of traders, brokers, and investors.
Now, most online brokers require traders to have sufficient funds in their accounts before buying stocks. Additionally, the industry no longer issues paper stock certificates to represent ownership. Although there are still some stock certificates from the past, today’s securities transactions are almost exclusively recorded electronically through a process known as book entries; and electronic transactions are supported by account statements.