Understanding Post-Trade Processing: How It Works & Key Examples

What Is Post-Trade Processing?

Post-trade processing is crucial in ensuring the accuracy and completion of a financial transaction. After a trade is executed, the buyer and seller verify trade details, approve the transaction, transfer ownership, and arrange payment for securities. This process helps eliminate errors, particularly in non-standardized markets like OTC, where trades don't rely on centralized clearinghouses.

Key Takeaways

Post-trade processing is a crucial step in verifying and finalizing trade details after the initial transaction is complete.
The clearing process involves reconciling purchases and sales, ensuring that transaction funds and securities are correctly transferred.
Settlement risk can occur if trades do not clear, potentially leading to financial losses due to accounting errors.
Effective May 28, 2024, the SEC has shortened the settlement period for most stock trades from T+2 to T+1 to improve efficiency.
Various securities currently settle on different timelines, with most stocks now settling on a T+1 basis, while others, like CDs, settle T+0.

How Post-Trade Processing Ensures Transaction Accuracy

Post-trade processing is important in that it verifies the details of a transaction. Markets and prices move fast; transactions are executed quickly, often instantaneously. Many securities trades happen over the phone, making mistakes possible despite traders' skill. More trades are now executed at high frequency solely by computers. Small mistakes can easily add up.

Post-trade processing allows the buyer and seller of securities to root out and rectify these errors. Post-trade processing involves matching buy and sell order details, updating ownership records, and authorizing payment.

Navigating Trade Clearing and Settlement Processes

After a trade is executed, the transaction enters what is known as the settlement period. During settlement, the buyer must make payment for the securities they purchased while the seller must deliver the security that was acquired. Depending on the type of security, settlement dates will vary. As an example of how settlement dates work, let's say that an investor buys shares of Amazon (AMZN) on Monday, June 3, 2024. The broker will debit the investor's account for the total cost of the order immediately after it's filled, but the status as a shareholder of Amazon will not be settled in the company's record books for the investor until Tuesday, June 4. At that time, the investor would become a shareholder of record.

Once the trade has settled, and the funds in any sale of stock or another type of security have been credited to your account, the investor may choose to withdraw the funds, reinvest in new security, or hold the amount in cash within the account. For those looking to cash out some of the profits (or what's left from a loss), check to see if your broker offers transfers to your bank account using the Automated Clearing House (ACH) or by using a wire transfer.

T+1

The settlement period for post-trade processing of stocks and several other exchange-traded assets. Effective May 28, 2024, the SEC shortened the settlement period from T+2 to T+1 days to reflect improvements in technology, increased trading volumes, and changes in investment products and the trading landscape.

Clearing is the process of reconciling purchases and sales of various options, futures, or securities, as well as the direct transfer of funds from one financial institution to another. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities ensures the delivery of the security to the buyer. Non-cleared trades can result in settlement risk, and if trades do not clear accounting errors will arise where real money can be lost.

An out trade is a trade that cannot be placed because it was received by an exchange with conflicting information. The associated clearinghouse cannot settle the trade because the data submitted by parties on both sides of the transaction is inconsistent or contradictory.

Real-World Examples of Post-Trade Processing in Action

On the NYSE Bonds Platform, following trade completions, all Depository Trust & Clearing Corporation (DTCC) / National Securities Clearing Corporation (NSCC) Regional Interface Organization (RIO) eligible bond trades are sent to NSCC in order to match trade details of both buyers and respective sellers. Details are transmitted through the RIO.

Post-trade services have come to the forefront as a means for financial firms to diversify their revenue streams. Due to a combination of heightened regulations, standardization of derivatives, and increasingly complex processing measures to accommodate the growth of alternative assets, post-trade services are an area in which some firms have a chance to outstrip competitors.

Is Anything Being Done To Shorten Post-Trade Processing?

Yes. In May 2024, the SEC shortened the clearing time for most stock trades to T+1. It is exploring the feasibility of same-day settlement, or T+0.

Why Does the Trade Date Differ From the Settlement Date for Stocks?

If you buy or sell shares of stock or other securities, the settlement date will typically be one day after the actual trade date. This is because it takes time for the post-trade processing, clearing, and settlement of the trade. Barriers to same-day settlement include older systems still in place to reconcile asset ownership and payment between exchanges, clearing firms, and brokerages.

What Kinds of Securities Currently Clear T+1? T+0?

Most stocks, ETFs, corporate bonds, municipal bonds, listed options, and government securities clear T+1. Spot FX trades typically settle T+2 (T+1 for USD/CAD). Certificates of deposit (CDs) and commercial paper settle T+0.

The Bottom Line

The bottom line in post-trade processing is its crucial role in verifying and settling trade transactions efficiently. As trades occur rapidly and errors are inherent in fast-paced transactions, this process clarifies the exchange details, updates ownership records, and ensures the proper transfer of securities and cash.

With the move to a T+1 settlement period effective May 2024, the industry aims to increase efficiency and reduce risks, paving the way for potential future advancements like same-day settlement. Understanding post-trade processing is essential for navigating today’s financial markets, particularly as the complexity of modern trading ecosystems evolves.