Many investors have not thought much about how stock, mutual fund and bond transactions actually settle. In most situations, the securities move in or out of a client’s account electronically. Most securities settle in one to three days after the trade date (commonly referred to as T+1 or T+3). Settlement simply means the securities are delivered in or out of the account on the established date.
For equity and mutual fund trading, custodians such as Fidelity, Schwab or TD Ameritrade act as brokers who execute trade orders. From the time of the trade until settlement, no further action is needed. For individual bond trades, however, the settlement process is significantly different.
Once a trade is placed, a trader with BAM Advisor Services, with whom we work, receives a trade ticket from the executing broker/dealer through Bloomberg. BAM’s fixed income trader confirms the trade details. At the end of the trading day, the details for all the day’s trades are exported from Bloomberg’s platform and onto BAM’s. The data is then used in many ways, including as a way to monitor trades for settlement. Custodians electronically receive client account allocations from BAM as well as the trade details from the executing broker/dealer. The custodian compares both allocations to check for discrepancies. If there are none, the custodian books the trade, and the bonds are delivered in or out on the settlement date. The trade is then considered settled.
It is important to note that trades settle either as a prime broker or a trade away. If the trade details from the broker match BAM’s trade details on a prime broker trade, the trade will “shadow post” to the client’s account. This means a client will see the bond in his or her account as well as the lower cash balance even before the actual settlement date. If the account doesn’t have prime broker, the trade won’t actually post in the client’s account until the settlement date. This could potentially lead to trade errors if an advisor forgets about the previous trade and only sees the large cash balance. The higher potential for trade errors is one reason why prime broker paperwork is strongly preferred.
If the trade details fail to match, the trade will not post (or settle). It is flagged by the broker or custodian and then researched to determine why the details don’t match. This can be something as big as an account number not matching or as minor as a rounding issue. BAM’s Fixed Income Desk works with the executing broker/dealer and the custodian to remedy any issues. As long as the details match on the settlement date, the delivery of the bonds is made. BAM runs a reconciliation report daily to ensure all trades have settled.
All fixed income trades involve two sides, and both have to execute their processes flawlessly for the trade to settle on time. If not, the trade might have settlement issues. For this reason, if trades are being placed to free up cash for a distribution or wire transfer, it’s prudent to allow for a few extra days to ensure a good settlement.
Please contact your Dopkins Wealth Advisor to continue the conversation.
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