Quick Answer
Members confirm customer transactions at or before completion. Outside its exceptions, the settlement cycle rule bars contracts settling beyond the first business day after the contract date unless the parties expressly agree otherwise at the time of the transaction. Between members, absent mutual cancellation, a fail leaves the contract standing: the buyer's remedy is a buy-in, the seller's a sell-out.
From the confirmation a customer receives to the close-out after a fail.
Which One-Liners Win Points?
- A confirmation goes out at or before completion. The Securities and Exchange Commission's rule reaches inducing a customer's purchase or sale as well as effecting it, and its definition of customer excludes a broker or dealer.
- The Financial Industry Regulatory Authority's additions include the settlement date on a national market system (NMS) stock or a security subject to over-the-counter (OTC) Reporting Facility reporting, other than a direct participation program, and a callable equity disclosure.
- The settlement cycle rule is a ceiling, not a fixed day. Exempted, government and municipal securities, commercial paper, bankers' acceptances and commercial bills sit outside it. A cash sale priced after 4:30 p.m. Eastern Time, sold by an issuer to an underwriter in a registered firm commitment offering or to an initial purchaser by a broker-dealer participating in that offering, gets a second-business-day ceiling.
- Uniform Practice Code delivery dates: cash on the day of the transaction; regular way on, but not before, the first business day after it; buyer's and seller's options on expiry, though a seller may deliver earlier after written notice a business day ahead.
- Between members, a fail does not cancel the contract unless the parties mutually consent, and the party in default is liable for damages.
- Dividend, distribution or warrant ex-date: below 25 percent of the security's value, with timely information, it is the record date if that is a business day; at 25 percent or more, the first business day after the payable date. Stock dividends and splits on American Depository Receipts and foreign securities instead take a date the Uniform Practice Code Committee designates. Cash transactions sit outside the rule.
- Options Clearing Corporation (OCC) assignment goes to clearing members with open short positions in the series, at or before 8:00 a.m. Central Time the next business day, dated as of the day the exercise notice was accepted.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Standard buy-in | No sooner than the third business day after delivery was due |
| Buy-in notice | By 12:00 noon Eastern Time, two business days before execution |
| Seller's rejection | Signed written response by 6:00 p.m. Eastern Time on the issue date |
| Seller's delivery | By 3:00 p.m. Eastern Time on the effective date |
| Cash or guaranteed-delivery contract | May be bought in without notice, normal trading hours, the day after delivery was due |
Which Gotchas Trip Students Up?
- Silence accepts a buy-in notice. Without a signed written rejection by 6:00 p.m. on the issue date, it is deemed accepted.
- A stay needs physical possession of at least one trading unit. A seller's notice before the closing that the securities are in transit or in transfer, giving the certificate numbers, forces a seven calendar day extension instead.
- An early regular way tender is only an offer; the purchaser may reject it without prejudice.
One-Breath Recap
Members confirm customer transactions at or before completion. Outside its exceptions, the settlement cycle rule bars a contract settling later than the first business day after the contract date unless the parties expressly agree otherwise at the time of the transaction. Between members, a fail does not cancel the contract; absent mutual consent to cancel, the buyer's standard buy-in comes no sooner than the third business day after delivery was due, after written notice, and the seller's remedy is a sell-out. Except stock dividends and splits on foreign securities or American Depository Receipts, a dividend or warrant distribution under 25 percent of the security's value, with timely information, goes ex on the record date if a business day, and one of 25 percent or more on the first business day after the payable date.
Need more than the recap? Read the full Clearance and Settlement unit.