Quick Answer
When-issued (WI) securities trade before they actually exist, such as a new municipal bond issue or IPO, so there is no set settlement date at the time of the trade. Settlement is fixed only after issuance, and if the offering is cancelled, every WI trade cancels with it. When-distributed securities work the same way for corporate actions like splits and spin-offs.
Now that you understand standard settlement cycles, there's an important exception: securities that haven't been issued yet. These trade on a when-issued basis with no set settlement date.
When-Issued (WI) Trading
- Securities trade on a when-issued basis before the actual issuance date
- Common for:
- New municipal bond issues
- New corporate offerings (IPOs)
- (Stock splits, spin-offs, and other corporate actions trade when-distributed, covered below, not when-issued)
- No accrued interest is calculated until the actual settlement date is established
- WI trades have no set settlement date until the securities are actually issued
- Exchange rules govern when-issued and when-distributed trading
Think of it this way: Buying a WI security is like pre-ordering a product that has not been manufactured yet. You agree on a price, but delivery (settlement) cannot happen until the product actually exists.
When-Issued Settlement Rules
- Settlement occurs on a date determined after the actual issuance
- If the issue is cancelled, all WI trades are cancelled
- WI trades carry the risk that the security may never be issued
- The settlement date is not known at the time of the trade; it is set only after the securities exist
Exam Tip: Gotchas
When-issued trades have NO settlement date at the time of the trade. Settlement is determined only after the securities are actually issued. If the exam asks "when does a when-issued municipal bond settle?" the answer is NOT T+1. It settles when the bonds are actually issued and a settlement date is established.
When-Distributed Securities
- Similar to when-issued, but applies to securities that will be distributed as part of a:
- Reorganization
- Stock split
- Spin-off
- Trading occurs before the actual distribution date
- Like when-issued securities, settlement happens after the distribution occurs
| Feature | When-Issued | When-Distributed |
|---|---|---|
| Trigger | New issuance (initial public offering, new muni bond) | Corporate action (split, spin-off, reorganization) |
| Settlement date | Set after issuance | Set after distribution |
| Cancellation risk | Yes; issue may be cancelled | Yes; action may not occur |
| Accrued interest | Not calculated until settlement date set | Not applicable (typically equity) |
Exam Tip: Gotchas
If a when-issued bond offering is cancelled, all WI trades are cancelled and no obligation remains. Accrued interest on WI municipal bonds is not calculated until the settlement date is established.
What Should You Check on Exam Day?
- If the exam asks when a when-issued security settles, the answer is never a fixed cycle like T+1. It settles once the security is actually issued or distributed.
- Distinguish the trigger: when-issued applies to new issuance (IPOs, new muni bonds); when-distributed applies to corporate actions (splits, spin-offs, reorganizations).
- Remember that a cancelled offering cancels every WI trade tied to it, with no obligation surviving on either side.