11.4 Trade Settlement and Reporting
Key Takeaways
- Regular-way settlement is T+1 for nearly all securities since the May 28, 2024 SEC shortening from T+2.
- With T+1, the ex-dividend date falls one business day before the record date.
- Confirmations must disclose trade and settlement dates, price, capacity, and commission or markup.
- TRACE reports corporate and agency bonds within 15 minutes; EMMA disseminates municipal data via the MSRB.
- NSCC clears and nets equity trades as central counterparty while DTC holds securities in book-entry form.
Settlement Cycles
Settlement is the exchange of securities for cash. Regular-way settlement is the default. Since the SEC shortened the cycle on May 28, 2024, regular way is T+1 (trade date plus one business day) for essentially all securities the Series 7 covers.
| Security | Regular-way settlement |
|---|---|
| Corporate stocks | T+1 |
| Corporate bonds | T+1 |
| Municipal bonds | T+1 |
| U.S. government securities | T+1 |
| Listed options | T+1 |
| Mutual funds | T+1 |
Note the exam contrast: U.S. Treasuries traded directly and many cash transactions can be same-day, but standard secondary trades settle T+1.
Alternative Settlement
| Type | When it settles |
|---|---|
| Cash | Same day (trade date) |
| Regular way | T+1 |
| Seller's option | A date chosen by the seller, minimum T+2, up to 60 days |
| When issued (WI) | When the security is actually issued |
Cash settlement demands same-day delivery and payment; it is common for dividend plays around the ex-date. A seller's option must be longer than regular way and the seller must give the buyer one business day's written notice before early delivery.
Ex-Dividend and Record Dates
The dividend timeline runs: declaration date → ex-dividend date → record date → payment date. Under T+1, the ex-dividend date is one business day before the record date (this changed when the cycle shortened; under the old T+2 it was two days before).
Worked example: Record date is Thursday, so ex-date is Wednesday.
- Buy Tuesday (before ex-date) → settle Wednesday → owner of record → receives the dividend.
- Buy Wednesday (on ex-date) → settle Thursday → not on record → no dividend.
A buyer who wants the dividend must purchase before the ex-date.
Trade Confirmations
A broker-dealer must send a written confirmation at or before completion of the transaction (settlement). Required content:
| Item | Detail |
|---|---|
| Trade and settlement dates | Execution and due dates |
| Security description | Name, CUSIP, quantity |
| Price | Per unit and total |
| Capacity | Agent or principal |
| Commission | If acting as agent |
| Markup/markdown | If acting as principal (disclosure rules apply) |
Trade Reporting Systems
TRACE (Trade Reporting and Compliance Engine) is FINRA's system for corporate and agency debt. Members must report a TRACE-eligible trade as soon as practicable, no later than 15 minutes after execution. (FINRA proposed a one-minute rule but, after industry concern, the SEC's September 2025 action kept the 15-minute deadline.)
EMMA (Electronic Municipal Market Access) is the MSRB's free portal for municipal trade data, official statements, and continuing disclosures.
| System | Operator | Covers |
|---|---|---|
| TRACE | FINRA | Corporate/agency bonds |
| EMMA | MSRB | Municipal securities |
| Consolidated Tape | SIP | Listed equities (Tape A/B/C) |
The Consolidated Tape reports last-sale equity data: Tape A = NYSE-listed, Tape B = NYSE American/regional, Tape C = NASDAQ-listed.
Clearing Infrastructure
Under the Depository Trust & Clearing Corporation (DTCC) umbrella:
- NSCC (National Securities Clearing Corporation) clears equities and corporate bonds, acts as central counterparty, and uses continuous net settlement (netting) to slash the number of deliveries.
- DTC (Depository Trust Company) is the securities depository, holding shares in book-entry (electronic) form and moving them between members.
- FICC clears government and mortgage-backed securities.
Settlement flow: (1) trade execution, (2) comparison/matching, (3) NSCC netting of obligations, (4) DTC moves securities while cash moves by wire.
Failed Trades
A fail occurs when a party misses delivery or payment by settlement. If the seller fails to deliver, the buyer may issue a buy-in: after required notice, the buyer purchases the securities elsewhere and bills the failing seller for any price difference. If the buyer fails to pay, the seller may execute a sell-out.
Good Delivery and Accrued Interest
For settlement to occur, securities must be in good delivery form. Stock generally must be delivered in round lots of 100 or in units that add to 100, properly endorsed. Bonds trade with accrued interest added to the price on most issues: corporate and municipal bonds accrue on a 30/360 basis (30-day months, 360-day year), while U.S. Treasuries use actual/actual. Accrued interest is calculated up to but not including the settlement date and is paid by the buyer to the seller, who has held the bond and earned that interest since the last coupon.
CNS and Why T+1 Matters
NSCC processes most equity activity through Continuous Net Settlement (CNS), a rolling system that nets each member's buys and sells per security into a single daily long or short position against NSCC. Shortening the cycle to T+1 reduces counterparty and market risk and the collateral members must post, because positions are open for fewer days—an exam-tested rationale for the 2024 change.
Common Exam Traps
- Regular way is T+1 for stocks, corporate/muni/government bonds, options, and funds since May 28, 2024; cash settles same day.
- Under T+1, the ex-date is one business day before the record date; buy before the ex-date to receive the dividend.
- TRACE = corporate/agency bonds, 15 minutes; EMMA = municipals (MSRB); Consolidated Tape = listed equities.
- DTC holds securities (book-entry); NSCC clears and nets as central counterparty—do not swap these roles.
- A buy-in is the buyer's remedy when the seller fails to deliver; a sell-out is the seller's remedy when the buyer fails to pay.
The record date for a cash dividend is set for Thursday. Under current regular-way settlement, the ex-dividend date is:
A member firm executes a corporate bond trade. Under current FINRA rules, the transaction must be reported to TRACE within:
Which DTCC entity holds securities in book-entry form and moves them between members, as distinct from the entity that nets and clears trades?