What is clearing and settlement
Clearing and settlement is the process that confirms a trade and then completes it. The buyer receives the asset, and the seller receives the money.
- Clearing comes first. The trade details are matched and confirmed, each side's obligations are calculated, and many trades are often netted into one amount per participant.
- Settlement comes second. The securities and the cash actually change hands, and the trade is final.
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Worked example (hypothetical)
Ali buys a block of shares in a listed company through his broker. Sara sells the same quantity through hers.
| Stage | What happens |
|---|---|
| Trade date (T) | The order is filled at the market price. Ali's statement shows the trade, but he does not own the shares yet. |
| Clearing | The trade is matched. Ali's obligation is calculated as quantity × price plus charges. Sara's obligation is to deliver the shares. |
| Settlement date | The cash leaves Ali's side and the shares arrive in his account. Sara receives the cash. |
If Ali sells before the settlement date, that sale also settles on its own later date. In the meantime his broker tracks both trades.
T+ settlement cycles
Markets describe the delay as "T+" followed by the number of business days between the trade date and the settlement date. For example, "T+2 settlement" means the trade settles a set number of business days after it is executed. The cycle differs by market and has changed over time. Check the current cycle on the exchange's official site or with your broker. Do not assume it is the same in every country.
Stock settlement in Pakistan
Supervision: Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers. Also, per the SECP, lists of licensed brokers are on the PSX and PMEX websites. Those licensed brokers handle clearing and settlement for their clients' trades. Ask your broker for the current settlement cycle and for any charges.
Formal definition and edge cases
- Delivery versus payment (DvP): the asset is delivered only if the payment is made, and the payment is made only if the asset is delivered. This removes the risk that one side pays and receives nothing.
- Central counterparty: a clearing house becomes the buyer to every seller and the seller to every buyer. It holds collateral to cover a member's default. See central counterparty.
- Failed settlement: one side fails to deliver cash or securities on time. This can lead to buy-in procedures or penalties.
- Dividends: the ex-dividend date is set from the settlement cycle. A buyer has to be on the register by the record date. See ex-dividend and record date.
- FX settlement risk: the two currencies in a deal can settle in different time zones. One side may pay before it receives.
- CFDs: a CFD (contract for difference) never settles into the underlying asset. Profit or loss is booked in cash on the trading account, and overnight positions are charged swaps. See cash vs physical settlement.
Leveraged CFD and forex trading can lose money fast. Fast booking of profit or loss on a CFD account does not reduce that risk. On offshore platforms, Pakistani regulators say: per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse. More on this in regulation and safety.
Where you see the term
- Broker reports: contract notes and account statements list the trade date and the settlement date separately.
- Platforms: some stock platforms show "settled" and "unsettled" cash or holdings.
- News: coverage of exchanges changing their settlement cycle, of clearing house rules, and of failed trades.
Related terms
Counterparty · Custodian · Derivatives · Forward contract · Fill and partial fill · Trading glossary
Frequent questions
What does settlement mean in simple words?
Settlement is the point at which a trade is completed. The buyer has the asset and the seller has the money.
Is clearing the same as settlement?
No. Clearing confirms the trade and calculates who owes what. Settlement is the actual transfer of the asset and the cash.
What does T+2 settlement mean?
It means the trade settles a set number of business days after the trade date. Check the exchange or your broker for the cycle that applies now.
Do CFD trades settle like shares?
No. A CFD is settled in cash on the trading account, and no underlying asset is delivered.
Who handles stock settlement in Pakistan?
Your trade goes through an SECP-licensed broker, and that broker handles settlement for you. Ask the broker for the current cycle and charges.