One of the main risks of long settlements is the failure of the other party to meet their contractual obligations. The long time span and volatility of the markets pose risks for both parties. The buyer may fail to make payment by the settlement date, interrupting cash flows. The risks of long settlements also apply when the transacting parties fail to meet their contract obligations, such as failing to deliver the asset. Here are some tips to avoid long settlements.
Traders must remember that a long settlement cycle can significantly increase market risk. A three-day settlement cycle can result in systemic failures. Fortunately, technology has made this process as short as possible. Today, technology makes it possible to reduce settlement time to two business days. However, it is still possible for a settlement cycle to be over three days. Despite these risks, it is vital for investors to understand the risks of long settlement cycles.
When buying an off-the-plan property, long settlement periods can cause a buyer to lose their initial deposit, as well as their mortgage loan. Even worse, the developer may sue them to recover their costs, including the difference between the contract price and the selling price. This is not a desirable scenario, so buyers should plan for this possibility. In addition, buyers should save until settlement day to cover unexpected costs. It is best to start saving for a long settlement time when possible.