Settlement Instruction

A settlement instruction is a message, or a stored set of details, that tells a bank, custodian, broker or settlement system how to complete a transaction: which asset to deliver or receive, how much, on what date, against what payment and through which accounts and intermediaries. Settlement instructions are used for securities trades, foreign exchange deals, money market transactions and interbank payments, and they are the operational link between a deal being agreed and value actually moving.

The term covers two related things. A transaction-specific settlement instruction is sent for each trade, for example to a custodian telling it to deliver bonds against cash on the settlement date. A standing settlement instruction (SSI) is a set of account and routing details that a firm provides in advance so that counterparties can settle any trade with it in a given currency or market without asking each time. Both differ from a customer's payment instruction, which asks a bank to make a single payment.

A typical securities settlement instruction includes:

• Transaction details. Trade date, settlement date, security identifier, quantity and, for trades against payment, the cash amount and currency.
• Direction and type. Whether the party is delivering or receiving, and whether the settlement is free of payment or delivery versus payment.
• Parties and accounts. The party's own securities and cash accounts, the counterparty, and each intermediary in the chain, such as the counterparty's custodian and the central securities depository where settlement takes place, often identified by BIC and account numbers.
• References. Unique references that allow the instruction to be matched with the counterparty's and traced afterwards.

For foreign exchange, a settlement instruction specifies the bank and account where each currency should be paid, usually the firm's nostro account for that currency.

Instructions for cash payments between banks follow the same logic. They identify the beneficiary institution, any intermediary bank and the account to be credited, and may specify a correspondent in the currency's home country. Treasury departments maintain similar instructions for paying suppliers, funding subsidiaries and moving money between their own accounts, and many corporate treasury systems store them as templates that users can select but not edit without approval.

Settlement instructions are usually sent electronically over SWIFT or a market's own network. In SWIFT's traditional securities messages, four core message types cover the main cases: receive free, receive against payment, deliver free and deliver against payment, numbered MT540 to MT543. The ISO 20022 equivalents belong to the securities settlement message family, which markets and infrastructures such as the Eurosystem's TARGET2-Securities platform use. For cash, settlement between banks uses payment messages such as pacs.009 for institution-to-institution transfers.

In most securities markets, both parties send instructions to the settlement system, which matches them on key fields such as security, quantity, amount, date and counterparty. Only matched instructions can settle. If a field differs, the instruction remains unmatched and the trade may fail, which is why firms confirm trades and settlement details early, often through confirmation matching services. On the settlement date, the system checks that the seller has the securities and the buyer has the cash or credit, then settles. Instructions that cannot settle for lack of assets are typically recycled and retried until they settle or are cancelled.

SSIs reduce the work and error rate of settlement by letting counterparties store each other's details once. Industry databases allow firms to publish and retrieve SSIs for many counterparties and markets, often identified by Legal Entity Identifier. Keeping SSIs current is a constant task, because banks change correspondents, accounts close and markets change practices. Many firms review their SSIs on a regular schedule and after any change in banking relationships. Outdated SSIs are a leading cause of settlement failures and misdirected payments.

Because SSIs determine where money is sent, changes to them are a target for fraud. Criminals impersonate counterparties by email and request that future payments be sent to new accounts, a variant of business email compromise. Firms protect themselves by accepting SSI changes only through authenticated channels or trusted databases, calling back known contacts to verify changes, applying four-eyes approval and monitoring for first-time payments to new accounts. Internal controls also separate the staff who maintain SSIs from those who release payments, reducing the risk of insider manipulation.