Settlement and good delivery
Settlement, the actual exchanging of securities for value, can come in basically 2 forms; Regular-way settlement and cash settlement. Most things will settle regular-way settlement unless stated otherwise. Mutual funds, always settle cash settlement.
Cash settlement
Cash settlement is how we might think things settle, and in the real world, often are, but in test world, unless it states otherwise, assume regular-way settlement is being used.
Cash settlement settles the same day, and is how mutual funds settle. Mutual funds trade at the next calculated NAV, the very end of effectively the same trade day that the money hit the account.
Seller’s option settlement
Seller’s option allows the seller to set the timeline for delivery of the underlying asset, and negotiate that with the purchaser. Usually only in forward contracts, it allows flexibility for the seller to deliver on their schedule.
When-issued, WI (when, as, and if issued along with when as and if distributed)
When-issued (WI) means that the actual security has not been issued or distributed yet. When the securities are actually issued and/or distribution begins, if nothing important has changed, FINRA will set the settlement and the transaction commences. If the final form is substantially different, all orders are canceled.
Regular-way settlement
Regular-way settlement rules were updated in May of 2024, to be the next day, or T+1. Corporate equity, municipal securities, government securities, and options, all settle next day, T+1
Regular-way settlement defining dividend dates
When investors have to own the stock in order to get the upcoming dividend, are defined because of regular way settlement.
Declaration date is simply when the board of directors meet and declare the dividend. At that meeting, the board of directors also decides when the dividend will be payed, which is the Payment date. Those are both set by the board of directors on the declaration date. They also set the Record date, the date the shareholder must own the shares, and be a “shareholder of record” on that date, in order to get the upcoming dividend.
The ex-dividend date, or ex-date, is the first day if you purchase the shares, you will not get the upcoming dividend. If you purchase the shares before the ex-date, you will get the dividend. If you buy on or after the ex-date, you will not get the upcoming dividend.
Good delivery
Good delivery is simply the idea that the securities being transacted are in the “proper form”. If they are not delivered in the correct form, the buyer is allowed to refuse the delivery.
Certificates that have been stained, ripped, torn, or otherwise damaged would be considered mutilated certificates; obviously are not in good delivery form without being properly authenticated, which could take time. Often, if securities get damaged, the owner can reach out the issuer, explain the situation, submit the damaged certificates to them for authentication and checking, and they will reissue undamaged certificates.
Partial deliveries of transactions are allowed, provided that each of the separate deliveries are individually in good delivery, following the rules below, and they do not leave odd lots, or left overs that are not in good delivery form.
For stocks, this means in even lots of 100. They can be combined, 30+40+30 is 100 shares, and an even lot, or 4 certificates each for 75, is 300 shares, or 3 even lots. 2 certificates of 75 could not be delivered, as they must be in even lots. There is an exemption for 1 odd lot; if a transaction was for 20 shares, there is no way to make it an even lot, but it is considered good delivery, as that is the full quantity of the trade.
For bonds, the denominations must be $1,000 or multiples of it. There is a maximum of $100,000 face, but if there is more, they can just be broken up into more. 3 $100,000 face bonds for example. Smaller-denominated bonds can be combined, provided the individual smaller bonds are in $100 increments, and they are combined into $1000 combinations. 5 $200 bond could be combined, but 8 $125 bonds could not be, even though 8x125 is 1000, $125 is not a $100 increment.
Stock power or written stock power, is the actual legal document required in order for the transfer of ownership of physical stock certificates, also referred to as assignment, or assigning, from one owner to the next. This is rarely to never dealt with in electronically held accounts. This document must have the exact same name as the account name, and must be backed by the member firm or a commercial bank, that is assisting the trade. Securities registered to 2 or more persons, must have all persons registered sign the stock power. If the stock power is not properly signed and executed, the transfer agent will not accept it, and it is not considered good delivery.
For persons personally holding physical certificates and wants to sell them, they will need to sign the certificates or the stock power, and that likely would need to be guaranteed. The signature guarantee has to come from a Medallion Signature Guarantee (MSG) program participant, usually a bank, broker dealer, or similar. Think notary public, but higher standards for more protection. Notaries are for general legal documents, MSG is for securities.
Fiduciary signatures, ie, executors, guardians, etc, are acceptable without needing additional signatures. Signatures of diseased individuals will never be acceptable. For diseased individuals, an executor’s signature is required.
When a security is registered to a corporate entity, the signature must be identical, although words like “and” and “company” can be written out and not using “&” or “Co”. Corporations themselves do not have hands. Therefore, they cannot physically sign themselves, but the broker-dealer will not allow signatures from a person they do not believe has been properly listed as an authorized person by the company’s board of directors to conduct securities business. The authorized person or persons can be given each time a transaction is needed, or are usually included in the corporate documents submitted when the account was opened.
When a physical security is being sold, as mentioned earlier, the customer generally would sign the back of the certificate and then send it to the broker-dealer. The problem of course, is that is basically a blank check of sorts, and if it was intercepted, bad things could happen. One way of preventing this is using the previously mentioned stock power. Send the certificate in 1 envelope, the stock power in a second envelope, and since without both nothing can happen, if either one is lost, nothing bad can happen in the account. They could also send registered mail, but there are of course risks with that too. They could also enter a specified third party, often a bank or the broker-dealer, and therefore it can only be transferred to them, and they would complete the transaction.
Sometimes clients use a firm as an agent, often a bank. These are most often institutional or high-net-worth clients. This lets them centralize their bookkeeping and accounting if they are executing transactions through multiple member firms. Each brokerage sends the trade details to the agent bank. The agent bank either pays the broker-dealer for their client’s purchases, or provides the brokerage with the securities for them to sell for the client. This is delivery versus payment (DVP) or receive vs payment (RVP).
DVP is when the broker-dealer gives securities to the agent bank, and then the agent bank gives them the cash. This is the same as a COD, a cash-on-delivery order. The broker-dealer has up to 35 calendar days.
RVP is when the broker-dealer gets securities from the agent bank and then makes a cash payment to the bank for the client.
Under FINRA and MSRB rules, a member firm may not accept DVP or RVP orders unless the member firm obtains the name and address of the agent at the time of order acceptance and has assurances that the name and account number of the end customer are on file with the agent. If accepted, the order will be marked DVP or RVP.