After a trade has been matched by a trading system, it needs to be cleared and settled so that the seller gets paid and the buyer gets ownership of the security traded.
Clearing is all steps of the post-trade processes apart from the final settlement — i.e. apart from the final payment and change in ownership.
Settlement is the last step in the post-trade process. Settlement may be:
- net: obligations between participants are set-off against each other, or,
- gross: each transaction is settled individually,
and may be:
- real-time: transactions are settled as and when trades are agreed with no delay, or,
- occur at regular intervals, usually on a rolling schedule at the end of a day.
If settlement is not real-time then it is usual to settle at the end of the days trading. This usually takes place a set number of days after trading that is the standard for a particular market or type of security. The standard terminology is to express this as T + number of days to settlement: so a T + 3 transaction will be settle at the end of the third day after the trade takes place.
Gross settlement is usually real-time, as there is no reason not to set off it batch end of day processing is used. Conversely real-time settlement is usually gross as there are no other transactions made in the same instant to set-off.