Tuesday, September 29, 2009

Regular Way Settlement

A customer just sent me an email that represents a concept many Series 7 students struggle with. She wrote:

Why is this answer 5 business days? I thought it was T+3 . . .?

An investor who buys 500 shares of common stock at $25 per share in a regular way transaction is required to deposit the money by
A. Trade Date
B. Settlement date
C. Trade Date plus 3 business days
D. Trade Date plus 5 business days

RESPONSE: broker-dealers must settle at T + 3. If they want to pay for their customer's trade and let the customer slide, they can only let him slide for 2 more business days; after that, they'd have to request an extension. So remember for a test question that firms settle at T + 3, but customers have 2 more business days to pay . . . if the firm wants to be that nice. We could say that customers must pay "5 business days after the trade," or "2 business days after regular-way settlement." It's imperative that we have at least two ways to say everything in this business in order to keep the customer totally confused.


  1. My question comes with the understanding that there are no holidays or weekends. So what if a trade date was made in the month of July on the 3rd or December on the 24th; since there are no weekends or holidays; what other holidays are there to consider when determining your Regular Way Settlement Date for Common Stock?

  2. Hi, Crystal. As you say, if a trade is made on July 3, the next day will not be a business day. If there is a trade on Dec 23rd, it could take a while for settlement. So, a seller might have to wait a while before taking a withdrawal from his account; once the trade settles, the money is his. You might be thinking too hard here--just skip any holiday or weekend. The test would use well-known holidays if that were a factor in the question.