KPI of the Day – Investments: % Unsettled trades
Definition
Measures the count of trades that are yet to be settled as part of the transfer process.
Purpose
To assess the efficiency of processing trade funds and proceeds.
Recommendations
Trade settlement in the finance industry marks the official transfer from one party to another, and it usually takes up to three business days. Until the moment ownership of financial assets is fully transferred, the trade is believed to be unsettled.
The amount of unsettled cash therein generally impacts the liability and cash flow of the business. Close monitoring and control of unsettled trades helps fund managers make purchasing and sales decisions, while providing an overview of the portfolio managed.
Although unsettled cash can temporarily be used for purchasing financial assets, regulations prohibit financial companies from selling these financial assets until the cash is completely settled. Therefore, if the amount of cash unsettled is too high, it can potentially slow down the company’s financial performance.
Moreover, even though the value of % Unsettled trades offers a prediction on short term capital gains, these gains are not definitive until the transactions are fully settled. Therefore, it is imperative for financiers to ensure that the procedures for such transactions are efficient and safe.
Several recommendations on adequately managing unsettled trades in the finance industry include the following:
- Clear policies and procedures on trade transactions and execution of payment;
- Restricted customer ability to extend payment beyond the deadlines convened through contract;
- A dedicated team to assist customers with issues on payments through calls and e-mails;
- Quick freeze of additional purchases for customers who have not fully completed their outstanding transactions.
The proliferation of unsettled trades in a firm’s stock disrupts the market’s ability to find the true market-clearing price for that stock. As a result, a troubled firm that comes under such an attack will be prevented from selling any stock into the capital market in order to raise capital to fund its ongoing operations.
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Tags: Investments, KPI
