What Is Post-Trade Processing?
Post-trade processing occurs after a trade is complete. At this point, the buyer and seller compare trade details, approve the transaction, change records of ownership, and arrange for the transfer of securities and cash. Post-trade processing is particularly significant in non-standardized markets, like the over-the-counter (OTC) markets.
Key Takeaways
- Post-trade processing takes place after a trade is finalized.
- Buyers and sellers compare trade details, approve the transaction, update ownership records, and arrange for the transfer of securities and cash.
- It includes a settlement period and often involves a clearing process.
- OTC trades that lack reliance on centralized clearinghouses must settle their trades independently, introducing counterparty and settlement risks.
How Post-Trade Processing Works
Post-trade processing is crucial as it verifies transaction details. Markets and prices can change rapidly, and transactions often execute instantaneously. Many trades, whether executed over the phone or at high-frequency by computers, are susceptible to errors.
Post-trade processing enables the identification and correction of these errors. Apart from matching buy and sell order details, it includes updating ownership records and authorizing payments.
Trade Clearing and Settlement
After a trade execution, the process enters what’s known as the settlement period. During this period, buyers must pay for the securities they purchased, and sellers must deliver the acquired securities. Settlement dates can vary based on the type of security. For instance, if an investor buys shares of Amazon (AMZN) on a Monday, the completion of the transaction, or settlement, might occur two days later on Wednesday when the investor becomes a shareholder of record. Once funds from any stock sale or another type of security are credited to your account, the options are to withdraw the funds, reinvest, or hold the cash in the account. Many brokers offer transfers to bank accounts via Automated Clearing House (ACH) or wire transfer for those interested in cashing out.
T+2
In March 2017, the SEC shortened the settlement period from T+3 to T+2 days to reflect advances in technology, increased trading volumes, and changes in the trading environment. T+2 indicates a two-day settlement period post-trade for various securities.
Clearing ensures the reconciliation of purchase and sale transactions of options, futures, or securities, alongside the direct transfer of funds between financial institutions. It confirms funds’ availability, records the transfer, and ensures securities’ delivery to the buyer. Incomplete clearing leads to settlement risks and potential financial losses from accounting errors.
An out trade arises when a trade is received by an exchange with conflicting information and thus cannot be placed. The clearinghouse fails to settle such trades due to inconsistent or contradictory data submitted by involved parties.
Examples of Post-Trade Processing
For example, NYSE Bonds Platform transmits details of bond trades to National Securities Clearing Corporation (NSCC) to match trade details between buyers and sellers through the Regional Interface Organization (RIO). Recent regulatory changes, standardization of derivatives, and growth in alternative assets’ complexity highlight the importance of post-trade services for firms looking for differentiated revenue streams.
Is Anything Being Done to Shorten Post-Trade Processing?
Indeed. As of Spring 2022, the SEC proposed reducing clearing times for most stock trades to T+1 and soliciting feedback on potentially moving to a T+0 same-day settlement. If approved, this proposal could become effective by Q1 2024.
Why Does the Trade Date Differ From the Settlement Date for Stocks?
The discrepancy between trade and settlement dates arises from the time required for post-trade processing, clearing, and settlement processes. Even though trades are executed instantly, older systems in place to reconcile asset ownership and payments between exchanges, clearing firms, and brokerages still necessitate these settlement periods.
Kinds of Securities Currently Clear T+2? T+1?
Currently, stocks, ETFs, corporate bonds, municipal bonds, and spot FX trades settle on T+2. Meanwhile, listed options and government securities settle on T+1, with certificates of deposit (CDs) and commercial paper settling on T+0.
Related Terms: settlement period, clearing process, counterparty risk, settlement risk, clearinghouses
References
- U.S. Securities and Exchange Commission. “SEC Adopts T+2 Settlement Cycle for Securities Transactions”.
- New York Stock Exchange. “Market Information”.
- U.S. Securities and Exchange Commission. “Statement on Proposal to Shorten the Settlement Cycle”.
