Tech, ExplainedFintech
Concept

T+1 settlement

When shares and cash actually change hands.

HOW IT WORKSA buyer and a sellertrade on an exchangeon day TThe order ismatched in afraction of a secondThe clearing houseworks out what eachside owes, andguarantees itOn T+1, the depositorymoves the shares andthe cash movesThe buyer sees theshares, and the sellerthe moneyThe shorter the wait before the handover, the less time there is for one side to fail.HOW IT WORKSA buyer and aseller tradeon anexchange onday TThe order ismatched ina fractionof a secondThe clearinghouse worksout what eachside owes,andguarantees itOn T+1, thedepositorymoves thesharesand thecash movesThe buyersees theshares, andthe sellerthe moneyThe shorter the wait before the handover, the less time there is for one side to fail.HOW IT WORKSA buyer and a seller trade on an exchangeon day T↓The order is matched ina fraction of a second↓The clearing house works out what eachside owes, and guarantees it↓On T+1, the depository moves the sharesand the cash moves↓The buyer sees the shares, and the sellerthe moneyThe shorter the wait before the handover, the less timethere is for one side to fail.
A trade is matched on day T, the clearing house works out and guarantees what each side owes, and on the next working day the shares and the cash change hands.
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T+1 settlement means that the shares and the cash of a trade change hands one working day after the trade is made. T stands for the trade date. Settlement is the moment when the buyer actually receives the shares and the seller receives the money. India moved all share trades to T+1 in 2023, and America followed in 2024. Since 2024, India has also offered settlement on the same day, called T+0, as an option for a limited set of shares.

Here is how it works in general. A buyer and a seller trade on a stock exchange on day T. The order is matched in a fraction of a second. A clearing house then steps in between the two. It guarantees that both sides will pay, and it works out how many shares and how much money each broker owes. On the next working day, the depository moves the shares into the buyer's account, and the cash moves to the seller. A depository is the institution that keeps the official record of who owns which shares.

Why make the cycle shorter? Until a trade settles, one side might fail to pay. A shorter cycle means less time for that to happen, and less money locked up as a guarantee. But the shorter the cycle, the more of the software must run in real time, without a night to fix mistakes.

Take, for example, a person who buys ten shares through a broker's app. The trade is matched at once, and clearing and settlement puts the shares in the buyer's account the next day.

Consider a bond issued as a token on a blockchain. On an asset tokenisation platform, the bond and the cash can change hands in minutes, which is close to instant settlement.

Say a shop accepts a card payment. The payment is approved in seconds, but the money reaches the shop's bank later, usually by the next working day, as described in authorisation and settlement.

How is settlement different from clearing? Clearing is working out who owes what, and guaranteeing it. Settlement is the actual handover of the shares and the money. The work that brokers and funds do around both is called post-trade processing.

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