Rolling settlement procedures ensure that settlement of a security trade takes place within a given number of days, called the settlement period. Completing a trade involves delivery and payment for goods. Rolling settlements reduce the settlement period compared to account settlements.
Formula
The security trade day becomes "T" and the settlement period is a number that identifies how many working or business days a transaction will take for delivery and payment. If the settlement period is five days, the rolling settlement will show "T+5 working days."
Benefits
Rolling settlements reduce delays. In an account settlement, all security trades settle on a set day, or account period, which for some may go beyond that of a rolling settlement. The securities sold in a rolling settlement are independent of each other and follow their own settlement period.
Goal
Rolling settlements ideally have a settlement period of zero days, but not all markets have achieved that number. The longer the settlement period goes, the greater the chance of a default on the trade, which will incur losses and hurt the market. If the settlement period can reach zero, trades will be completed on the same day, minimizing the overall risk.
