Settlement

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000">  <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table1"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table2"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Settlement</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table4"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="0%" align="left" valign="top"><p class="word_list"> <a href="#cash prices">cash price</a><p class="word_list"> <a href="#cash settled">cash settlement</a><p class="word_list"> <a href="#cash">cash trade</a><p class="word_list"> <a href="#cost, insurance, freight">cost, insurance, freight</a><p class="word_list"> <a href="#ex-dock">ex-dock</a><p class="word_list"> <a href="#ex-warehouse">ex-warehouse</a><p class="word_list"> <a href="#forward setled">forward settlement</a><p class="word_list"> <a href="#forward trades">forward trade</a><p class="word_list"> <a href="#free alongside">free alongside</a><p class="word_list"> <a href="#free on board">free onboard</a><p class="word_list"> <a href="#in-warehouse">in-warehouse</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> <td width="100%" align="left" valign="top"><p class="word_list"> <a href="#overnight">overnight</a><p class="word_list"> <a href="#regular way settlement">regular-way settlement</a><p class="word_list"> <a href="#settles">settlement</a><p class="word_list"> <a href="#settlement date">settlement date</a><p class="word_list"> <a href="#spot-next">spot-next</a><p class="word_list"> <a href="#spot prices">spot price</a><p class="word_list"> <a href="#spot settled">spot settlement</a><p class="word_list"> <a href="#spot">spot trade</a><p class="word_list"> <a href="#tom-next">tom-next</a><p class="word_list"> <a href="#value date">value date</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="right" id="table5"> <tr> <td align="right" width="9" height="14"></td> <td width="300" height="14"> <font size="2"> </font><font size="4"> </font></td> </tr> <tr> <td align="right" width="9"> </td> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body">In finance, a contract <b><a name="settles">settles</a></b> when one or both parties perform on an obligation under that contract. The term is commonly used in trading and <a href="../articles/derivative_instrument.htm">derivatives</a> markets.</p> <p class="body">In trading, a trade settles when the instrument being traded actually changes hands and/or is paid for. Both events typically occur on the same date, which is called the <b><a name="settlement date"> settlement date</a></b>. </p>  <p class="body">Because of mistakes or events beyond the control of counterparties, transactions sometimes fail to settle on the intended date. For this reason, it is useful to distinguish between a transaction's <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> date and its <b><a name="value date">value date</a></b>. The former is the date on which the transaction actually settles. The latter is the date on which it is intended to settle at the time of the trade. </p> <p class="body">When a <a href="../articles/valuation.htm">market value</a> is calculated for an instrument, this is typically as of the value date. In this way, the market value reflects the value that the instrument would command in the market for payment and delivery on the value date. If an entire portfolio must be marked to market, some common value date is assumed for all instruments.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="165" align="left" id="table6"> <tr> <td width="160"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td> <td width="11"> </td> </tr> </table> <p class="body">A trade is <b><a name="spot settled"> spot settled</a></b> if the <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> date occurs on a specific date shortly after the trade date. The actual date depends upon the market. In foreign exchange markets, spot transactions settle in two trading days. Corporate debt generally trades for <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> on the third trading day following the trade date. This is called <b><a name="regular way settlement">regular-way settlement</a></b>. </p> <p class="body">Spot <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> generally reflects the earliest date that transactions typically settle in a given market. However, in some markets, it reflects convention more than practical limitations on how quickly a given transaction can settle. In such markets, pre-spot <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> may be possible, including <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> on the trade date. A trade is said to be <b><a name="cash settled">cash settled</a></b> if <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> occurs on the trade date. </p> <p class="body">A trade is <b><a name="forward setled">forward settled</a></b> if it settles on some date after spot. Forward transactions, called <a href="../articles/forward.htm">forward contracts</a> of <a href="../articles/forward.htm">forwards</a>, routinely have <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> dates up to a year after the trade date. </p> <p class="body">If a trade has a cash, spot or forward value date, it may be called a <b><a name="cash">cash</a></b>, <b><a name="spot">spot</a></b> or <b> <a name="forward trades">forward trade</a></b>. Prices at which cash, spot and forward trades transact are called <b> <a name="cash prices">cash prices</a></b>, <b><a name="spot prices">spot prices</a></b> and <a href="../articles/forward.htm">forward prices</a>. </p> <p class="body">In the debt markets, a loan is agreed to on one date, but it is said to settle on the date the loan commences. Analogous to trading, there are <a href="../articles/fixed_income_term_structure.htm">cash loans</a>, <a href="../articles/fixed_income_term_structure.htm">spot loans</a> and <a href="../articles/fixed_income_term_structure.htm">forward loans</a>. For example, in the Eurodollar markets, spot loans settle in two trading days. Forward loans settle after that. If interest rates are fixed at the time loans are agreed to, interest rates will differ for spot or forward loans. For example, the interest rate on a 3-month spot loan will generally differ from that on a 3-month forward loan commencing in a year. Accordingly, the markets distinguish between <a href="../articles/fixed_income_term_structure.htm">spot interest rates</a> and <a href="../articles/fixed_income_term_structure.htm">forward interest rates</a>. See also the article <i> <a href="../articles/forward_rate_agreement.htm"> forward rate agreement</a></i>.</p> <p class="body">In the money markets and foreign exchange markets, very short-term loans are used to manage short-term cash flows. An <b> <a name="overnight">overnight</a></b> loan commences immediately and lasts for one trading day. A <b><a name="tom-next">tom-next</a></b> ("tomorrow-next") loan commences in one trading day and lasts for one trading day. A <b><a name="spot-next">spot-next</a></b> loan commences in two trading days (spot) and lasts for one trading day.</p> <p>In commodity markets, physical commodity trades settle in several ways. While specifics vary from one market to another, some standard methods are: </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="right" id="table7"> <tr> <td align="right" width="9"> </td> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="free on board">free onboard</a></b> (FOB)—the commodity is cleared through customs and delivered on board the recipient’s ship at the port of departure. <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="free alongside">free alongside</a></b> (FAS)—FOB delivery, except the commodity is delivered alongside the recipient’s ship. <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="cost, insurance, freight">cost, insurance, freight</a></b> (CIF)—FOB delivery as well as insurance and shipping. Essentially, the commodity is delivered to the destination port, but actual <img border="0" src="../word/settlemnt1.gif" align="absbottom" width="59" height="15"> is through delivery of the ship’s bill of lading. <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="ex-dock">ex-dock</a></b>—the commodity is cleared through customs and delivered on the dock of the destination port. <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="in-warehouse">in-warehouse</a></b>—the commodity is cleared through customs and delivered in a warehouse at the destination port. <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="ex-warehouse">ex-warehouse</a></b>—the delivering party provides in-warehouse delivery and pays the cost of moving the commodity to the warehouse exit. <p class="body">In the context of derivatives, a derivative settles when one or both parties perform on an obligation under the derivative contract. For example, a <a href="../articles/swap.htm">swap</a> contract calls for periodic payments to be made between two parties. The swap settles each time a payment is made. Margin is paid on <a href="../articles/future.htm">futures</a> contracts every trading day. Accordingly, futures settle daily. Consider an <a href="../articles/exchange_traded.htm">OTC</a> <a href="../articles/option.htm">call option</a> on oil. If exercised, the option settles when the oil is delivered and/or payment is made for the oil.</p> <p class="body">Trading organizations have a back office (or operations department). One of this department's purposes is to settle trades and/or other obligations on behalf of the organization.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table9"> <tr> <td width="100%"> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/custodian.htm">custody</a> The safekeeping of securities and related services.</strong></p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/exchange_traded.htm">exchange traded</a> Traded on a formal exchange such as the New York Stock Exchange or Chicago Board of Trade.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/forward.htm">forward contract</a> A </strong>trade that is agreed to at one point in time but will take place at some later time.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/netting.htm">netting</a> The offsetting of cash flows or other obligations against each other.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/par_value.htm">par value</a> A stated value for a security.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/physical%20settlement.htm">physical settlement, cash settlement</a> Describes the two ways derivative instruments can settle.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/settlement_risk.htm">settlement risk</a> A </strong>form of credit risk that arises at the settlement of a transaction.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/transaction_costs.htm">transaction costs</a> Direct costs associated with transacting trades.</p> </td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" width="75"> <img border="0" src="../images/ad_side_banner_1.jpg" width="103" height="285"></td> <td bgcolor="#FFFFCC" width="99%">  <p class="ad_legend" style="margin-left: 0; 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Weiss</b></td> </tr> <tr> <td width="10%"><map name="FPMap688"> <area target="_blank" href="http://www.riskbook.com/main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/star_5.gif" usemap="#FPMap688" width="90" height="16"></td> <td width="10%" class="author">quality</td> <td width="70%"> <p class="author"> </td> </tr> <tr> <td width="10%"><map name="FPMap689"> <area target="_blank" href="http://www.riskbook.com/main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/tech_1.gif" usemap="#FPMap689" width="90" height="16"></td> <td width="10%" class="author">technical</td> <td width="70%">  </td> </tr> <tr> <td width="10%"> <p class="author">2006</td> <td width="10%"> </td> <td width="70%"> <p align="center"><map name="FPMap425"> <area target="_blank" coords="0, 0, 145, 19" shape="rect" href="http://www.riskbook.com/link/weiss_d_(1993).htm"> </map> <img border="0" src="../images/pointer_review.gif" usemap="#FPMap425" width="146" height="20"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="4" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table13"> <tr> <td width="100" align="left" valign="top"> <map name="FPMap422"> <area target="_blank" href="http://www.riskbook.com/link/simmons_m_(2002).htm" shape="rect" coords="0, 0, 83, 124"> </map> <img border="0" src="../images/book_simmons_m_(2002)_125.gif" usemap="#FPMap422" width="84" height="125"></td> <td align="left" valign="top"> <table border="0" cellpadding="1" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table14"> <tr> <td width="90%" colspan="3"> <p class="title"> <a target="_blank" href="http://www.riskbook.com/link/simmons_m_(2002).htm"> Securities Operations</a></td> </tr> <tr> <td colspan="3"> <p class="author"><b>Michael Simmons</b></td> </tr> <tr> <td width="10%"><map name="FPMap631"> <area target="_blank" href="http://www.riskbook.com/main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/star_6.gif" usemap="#FPMap631" width="90" height="16"></td> <td width="10%" class="author">quality</td> <td width="70%"> <p class="author"> </td> </tr> <tr> <td width="10%"><map name="FPMap632"> <area target="_blank" href="http://www.riskbook.com/main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/tech_1.gif" usemap="#FPMap632" width="90" height="16"></td> <td width="10%" class="author">technical</td> <td width="70%">  </td> </tr> <tr> <td width="10%"> <p class="author">2002</td> <td width="10%"> </td> <td width="70%"> <p align="center"><map name="FPMap366"> <area target="_blank" coords="0, 0, 145, 19" shape="rect" href="http://www.riskbook.com/link/simmons_m_(2002).htm"> </map> <img border="0" src="../images/pointer_review.gif" usemap="#FPMap366" width="146" height="20"></td> </tr> </table> </td> </tr> </table> </td> </tr> </table> </td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table15"> <tr> <td width="100%" bgcolor="#FFFFFF">  <p align="center"><map name="FPMap0_I1"> <area target="_top" href="http://www.riskglossary.com" shape="rect" coords="0, 0, 164, 102"> </map><img border="0" src="../images/logo.jpg" usemap="#FPMap0_I1" width="165" height="103"></p> <p align="center"><span class="verdana10"> <a href="http://www.riskglossary.com/main/disclaimer.htm">Disclaimer</a></span></p> <p align="center">website: <span class="verdana10"> <a target="_top" href="http://www.contingencyanalysis.com">http://www.contingencyanalysis.com</a></span><br> glossary direct link: <span class="verdana10"> <a target="_top" href="http://www.riskglossary.com">http://www.riskglossary.com</a></span><br> copyright © Contingency Analysis, 1996 - current</p> <p align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_glossary_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p> </td> </tr> </table> </td> </tr> </table> </td> <td>  </td> </tr> </table> </div> </body>