Handbook of Investment Administration

Chapter 4

SETTLEMENT

4.1 INTRODUCTION

Trading of securities involves the transfer of ownership from the seller to the buyer and the exchange of cash to pay for the purchase. Clearing and settlement are the processes that allow these transfers to take place efficiently and safely.

In this chapter, we start by looking at the fundamentals of settlement and then see how these fit in with the settlement process before moving on to how the settlement process operates in the UK and internationally.

4.2 FUNDAMENTALS OF SETTLEMENT

Introduction

Settlement refers to the process that takes place following execution of a trade whereby there is an exchange of securities for cash, the latter representing the cost of purchase of the securities.

For settlement to take place, the necessary legal formalities for the transfer of the securities needs to be undertaken. Traditionally that would have required completion of a stock transfer form and the physical delivery of the transfer form and the certificates to the purchaser. They would then arrange for these documents to be deposited with the company registrar in order that the purchaser's name could be recorded on the company share register. At some point during this process, a transfer of cash would take place using the banking system.

Most modern settlement systems have removed what was a long-winded and paper-intensive process and have replaced it with electronic transfer of title accompanied with a simultaneous exchange of cash.

Before looking ...