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.

2 comments:

  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?

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  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.

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