Unsettled Funds (2024)



How do I cover my trades?

If your purchase exceeds the funds available in your account, in most cases, you can cover your trade by making a deposit of funds or marginable securities on or before trade settlement. If you choose to cover the amount due by selling a different security, the sale must occur on or before the purchase date to avoid a liquidation violation. Depositing marginable securities to cover funds due is only possible in a margin account, not a cash account.

NOTE: For most equity transactions, the settlement period is three business days from the day your order executes.

What is a liquidation violation?

This trade violation is the result of buying a security which creates a Cash Account debit or Margin Account Fed Call, and then covering the amount due by selling another security the following trade date or later.

Example: <![CDATA[ ]]>
Day 1 $100 settled credit
Day 1 Buy 100 ABC @ 10
Day 3 Sell 100 XYZ @ 20
The purchase of ABC results in a $900 debit balance. Two days later XYZ is sold but payment was not made for the ABC purchase. The sale of XYZ results in a Liquidation Violation.

If an option or mutual fund is sold the day after a stock is purchased, a liquidation violation will be charged even if the proceeds settle on or before the purchase settlement date.

Subsequent liquidation violations in a rolling twelve month period will result in the account being restricted to Settled Cash-Up-Front for 90 days.

In addition, a permanent, Settled Cash-Up-Front restriction will be placed on the account after five or more trade settlement violations within the life of the account.

To avoid a liquidation violation, see How do I cover my trades? above.

What is a cash account?

An account in which the client has to pay for all trades in full by settlement date.

What is a freeride violation?

A freeride violation is the result of buying a security in a Cash Account and then selling the same security without making separate payment on the full purchase price by settlement date. To avoid a freeride violation, you must settle your buy order independently of selling the same security.

Example:
Day 1 $100 settled credit
Day 1 Buy 100 ABC @ 10
Day 3 Sell 100 ABC @ 15
The purchase of ABC creates a $900 debit balance. ABC is sold but full payment was not made for the ABC purchase. The sale of ABC therefore results in a freeride and immediate 90-day settled cash up front restriction.

Example: <![CDATA[ ]]>
Purchasing 300 shares of ABC and selling it 3 days later without paying for it is considered to be freeriding.

After one freeride, a 90-day Settled Cash-Up-Front restriction is placed on the account. A permanent Settled Cash-Up-Front restriction will be placed on the account after five or more trade violations over the life of the account.

What is a Good Faith Violation?

A good faith violation is the purchase of a security with unsettled funds, and subsequent sale of that security before the proceeds funding that purchase have settled.

Example:
Day 1 Sell 100 XYZ @ 20
Day 1 Buy 100 ABC @ 10
Day 2 Sell 100 ABC @ 15
The purchase of ABC is made using unsettled proceeds generated by the sale of XYZ, which will not settle until Day 4. Because the ABC is sold prior to settlement of the XYZ proceeds used to make that purchase, the sale results in a Good Faith Violation.

Settled and Unsettled Funds

Settled funds are incoming cash (such as a deposit or wire), available Margin Loan Value and settled sale proceeds of fully paid for securities.

If the account has sufficient settled funds, there are no restrictions as to what may be purchased. If a security is purchased using settled funds, there are no requirements surrounding the timeframe of when the newly purchased security can be sold.

If the credit balance is a result of an unsettled sale of securities, certain restrictions may apply. Unsettled proceeds from existing long positions can be used to purchase additional securities as long as the new purchase is not sold prior to the settlement date of the original sale that generated the proceeds used to finance the purchase. If it is sold prior to the settlement date of the funding sale without additional funds being deposited, it will be considered a Good Faith Violation.

Example:
If you sell a fully paid for security on Monday the 1st, you can use the proceeds to purchase securities prior to the settlement day of Thursday the 4th. However, if you purchase securities before Thursday the 4th and then sell the new position before the settlement of Monday's sale, you will then be charged with a Good Faith Violation. This is because the security purchased with unsettled cash was sold before payment of settled funds was made. If you purchase on Thursday the 4th, you may place a sell at anytime, since the purchase was made with settled funds.