What it means
When you buy a share, the trade is agreed instantly but the money and the shares change hands later. That gap is called the settlement period, and different markets have set it differently over time.
Under rolling settlement, a trade done on Monday settles a set number of business days later, a trade on Tuesday settles the same number of days after Tuesday, and so on. Before rolling settlement became the norm, many markets used an account period.
All trades made during a period, often a week or two, were settled together on one day, so a buyer could trade several times in a period before having to pay. That approach created long and uneven gaps between trading and payment, and it increased the risk that a counterparty might fail in the meantime.
Shorter, evenly timed cycles reduce this exposure. The shorter the gap, the less time there is for a counterparty to default or for prices to move sharply against an unpaid trade.
For this reason, regulators in many markets have shortened the standard cycle over the years, and the length is set by each market's regulator. For a business or an investor, the practical effect is on cash timing.
A company selling shares needs to know when the cash will arrive, and a buyer needs to have funds available on the settlement date. Treasury teams building a cash forecast should use the trade date plus the correct number of business days, excluding weekends and market holidays.
Rolling settlement also affects trading rights. In most markets, a buyer who sells shares before they have settled may still be allowed to do so, but the sale itself still settles on its own cycle, so the investor needs to make sure the shares are delivered in time.
The main nuance is that settlement cycles can differ between asset types and between countries. Shares, bonds, currency trades and funds may each follow their own conventions.
Always check the rule for the specific instrument and market before building a forecast.
In practice
Real-world examples.
Example
A corporate treasurer sells shares in a listed investment on a Thursday to fund a supplier payment. The market settles on T+2, so the cash arrives the following Monday, not Friday. She schedules the supplier payment for Tuesday so the account is never short.
Example
A retail investor buys a $5,000 position on the last trading day before a long holiday weekend. Because holidays do not count as business days, settlement is later than he expected. His broker's statement shows the correct settlement date, which he checks before moving money.
Example
A fund administrator reconciles a day of trades for a pension fund. She groups each trade by its own settlement date rather than by the trade date, so that the cash forecast for each day matches what the custodian will actually pay or receive.
Formula
Calculation
Settlement date = trade date + n business days (where n is the settlement cycle, for example 2 for T+2)
Suppose a company buys 1,000 shares at $50 per share on a Monday in a market that uses T+2. The cash needed is 1,000 x 50 = $50,000. Counting two business days forward, Tuesday is T+1 and Wednesday is T+2, so the $50,000 must be paid and the shares delivered on Wednesday. If a public holiday fell on Tuesday, the settlement date would move to Thursday because only business days are counted.Case study
Seen in the real world.
Kestrel Capital is an illustrative, fictional investment firm that moved from a market using a weekly account period to one using rolling settlement. Previously all of a week's trades settled on a single Friday, so the firm's cash position moved in one large step.
After the change, the operations manager found that settlements were spread over every day of the week. On a typical week, about $6,000,000 of purchases that once settled in one block were now split into five daily amounts of roughly $1,200,000.
This smoothed the firm's borrowing needs and cut the risk linked to any single counterparty. The illustrative lesson is that rolling settlement trades one big, risky payment day for many smaller, more predictable ones.
Watch out
Common mistakes.
- Counting calendar days instead of business days, which leads to the wrong settlement date and a missed payment.
- Assuming that every market and every instrument uses the same cycle, when shares, bonds and currencies often follow different rules.
- Treating the trade date as the date the cash moves, when the money usually moves at settlement.
Questions
People also ask.
What does T+2 mean?
It means the trade settles two business days after the trade date, so a Monday trade settles on Wednesday if there are no holidays in between.
Why did markets move to rolling settlement?
A shorter and more even cycle reduces the time in which a counterparty can fail and makes cash flows easier to forecast.
Does rolling settlement apply to every trade in a market?
Usually it applies to the main securities market, but certain trades such as new issues or negotiated deals can have their own settlement dates.
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