Settlement Procedures
At each leg of a trade both buyer and seller must exchange payment for securities in order to finalise the transaction. This final exchange is known as settlement, during which buyer and seller details are matched, ownership of the security reassigned, and payment made.
Settlement follows the clearing process, during which accountability for both sides of this process is established, and the obligations of both parties (for delivery of securities or payment of funds) are determined.
Selected stock exchanges and market participants automatically route transactions to a settlement system (for instance Clearstream or Euroclear) following the trade. For over-the-counter (OTC) trades, a choice of easy-to-use connectivity tools is provided to allow customers to submit instructions and receive reports. Either way, cash and securities instructions are validated (with any errors reported back to the customer immediately), matched, checked for provision, and released for settlement across the settlement system's platform.
Once an instruction is sent, the settlement system ensures that transactions settle on time using a book-entry system in which cash and securities change hands simultaneously. This delivery versus payment (DVP) settlement process eliminates principal risk for customers, which in turn sustains the necessary confidence required to drive market liquidity.
UBS settles its trades through various settlement systems, such as Euroclear. We also settle through Crest and provide domestic settlement facilities to particular counterparties who do not have access to these settlement and clearing systems.
Settlement is a very important process in a repo transaction, especially if the factor driving the repo trade is the need of a particular security. Settlement has to be completed two days from the trade date for a repo transaction (it may also settle in less time: T+0 also known as same day, or T+1 also known as tom start) as opposed to other outright trades, which are generally settled on a three-day basis (known as corporate start) after trade date. This is why settlement systems are a key factor in the success of the repo market.
Electronic repo trading platforms such as BrokerTec, Eurex Repo and MTS Group have emerged in the past few years. Most of them offer the entire operational chain from trading through to clearing and settlement. A brief diagramatic description of how the repo trade is processed is through Eurex repo is illustrated below.
