Settlement Cycle for Broker-Dealer Transactions

Instructor: Bryant Trombly

Bryant has taught graduate finance and has an MBA and master's degree in information technology.

In this lesson you will learn about the settlement cycle for broker-dealer transactions, the importance of when settlement and delivery occurs, and the SEC rule that governs settlement cycles. Updated: 10/11/2019

Securities Settlement Cycle

Stacy has opened a new investment account at Blue Brokerage and is excited to begin buying and selling her first securities. After a few transactions, she notices that on her account activity report there is both a transaction date and a settlement date listed.

The settlement cycle refers to the amount of time it takes for a securities transaction to officially clear. This means that the securities and the cash have been exchanged between the buyer and the seller through the broker-dealer.

If Stacy has purchased a security like stock, full settlement means that the stock in her account has been fully paid for and can now be sold at any time without a concern.

If Stacy had sold a stock from her account, full settlement means that the cash payment she has received in exchange for the stock is fully cleared and may now be invested again or withdrawn as she chooses.

If, before a transaction settles, Stacy tries to sell a stock she has purchased or invest or withdraw cash from a stock she has sold, she will likely receive some sort of error or warning from her broker-dealer. This can often be confusing for investors because broker-dealers will show the stock or cash in an investor's account before either has settled.

SEC Rule 15c6-1

SEC Rule 15c6-1 is the official rule that governs the terms and timing of the securities settlement cycle. It mandates that a contract for the purchase or sale of a security must provide for the payment of funds and the delivery of securities no later than the second business day after the transaction. If Stacy was to sell a stock in her account on a Monday, she wouldn't be able to reinvest or withdraw the cash until Wednesday, the second business day after her transaction.

This is commonly know as T+2 settlement where T denotes the transaction date and the +2 accounts for the two required business days.

Not all securities settle in this way. The SEC lists a few exemptions, including:

  • Specifically exempted securities
  • Government securities
  • Municipal securities
  • Commercial paper
  • Bankers' acceptances
  • Commercial bills

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