At the end of the month, or within the first few days of the following month, IB follows these steps:
- IB recalculates all the interest amounts using the calculations above. The new calculation is usually identical to the original cash accruals but may vary by small amounts due to corrections in settled balances or rates.
- IB determines the cumulative accrued cash for the previous month as the sum of the individual days.
- IB reverses this amount in the Accrued Cash sub-account at the beginning of the following month. For example, if the accrued cash balance for July was positive, we apply a debit charge to accrued cash in early August.
- Simultaneously, we book the final interest calculation from Step 1 above to the regular cash account. In effect, Steps 3 and 4 above convert "pending cash" to "actual cash."
- These transactions 2 are reported on the Monthly Statement.
Trade Date versus Settlement Date (or Value Date)
In most large financial transactions, there is a time delay between the date on which the transaction is agreed to, and the date on which it settles, i.e, when the actual payment occurs. In the case of stocks (for example US stocks) there is a three business day settlement period. If the trade is executed on a Monday, under normal settlement conditions the actual transfer of money occurs on Thursday. If the trade occurs on Wednesday, three business days later crosses the weekend so normal settlement is the following Monday. Exchange and banking holidays the fall within the settlement period will push back the settlement date.
Why is the Settlement Date Important?
Only settled money is considered for interest rate purposes. When one buys stock, one retains the rights to interest on the money until settlement date. Similarly, sellers only start to receive interest beginning on settlement date.
Settlement Dating is generally a minor consideration for stock, option, and future traders. However, due to the large amounts of capital involved, understanding the concept of Settlement Dating is critical to FOREX and fixed income (bond or money market) traders.