Settlement Agent

What Is a Settlement Agent?

A settlement agent is a party who helps complete a transaction between a buyer and a seller. This is done through the transfer of securities to the buyer and the transfer of cash or other compensation to the seller.

For a real estate transaction, closing agents are professionals who function chiefly for the buyer by conveying the selling interest from the buyer to the seller and ensuring the orderly transfer of the legal title from the seller to the buyer through the closing process.

A settlement agent plays a central role in ensuring a "quick close." As such, not all agents are the same. For challenging transactions, specialized skills and knowledge may be required. Even a seasoned agent can be tested under the pressure of a high stakes close. Settlement agents are also known as "closing agents" or "conveyancers."

How a Settlement Agent Works

During the settlement of a trade in which actual securities and money are exchanged, settlement agents are responsible for settling the accounts of traders and making the process more efficient. This process can occur several days after the original transaction. In the financial markets, clearing is the process by which trades settle.

Clearing is the reconciliation of orders between the transacting parties in the purchase and sale of options, futures, stocks, and other securities. It includes the prompt transfer of securities to the buyer and funds to the seller by an intermediary third party. The process involves the confirmation of funds needed to complete the transaction and the accurate recording of the transaction's details.

In real estate transactions, the duties of a settlement agent can extend to examining land titles for accuracy, pro-rating property fees for the current year of the transaction, and interacting with local and state agencies to notify them about the transfer of ownership.

Types of Settlement Agents

For stock trades and other security transactions, a clearing firm or clearing house acts as a settlement agent. Stock exchanges have clearing houses that have a wide range of responsibilities to ensure the smooth settlement of trades. These responsibilities include collecting and maintaining margin funds, ensuring delivery of purchased securities, and reporting transaction details to all parties.

For real estate transactions, a settlement agent can be an escrow agent, real estate attorney, or representative of a title company that conducts the closing or "settlement" of a home purchase transaction. Other functions include coordinating the attendance and document signing for all the parties, and the verification that each side has performed their required responsibilities as outlined in the contract. The settlement agent disburses all funds, along with the title and deed, to the appropriate parties after checking that all conditions are met at the transaction's close.

Special Considerations

Settlement risk refers to the risk that a buyer or seller fails to meet their obligations in the transaction. This frequently results in the failure of the transaction to successfully close or settle. In the securities market, there are two main types of settlement risk: default risk and settlement timing risk.

Default risk is when one of the parties completely fails to deliver on their obligations, such as when a firm goes bankrupt. Settlement timing risk is when the transaction eventually settles, but not within the agreed-upon time frame. In the past, settlement timing risk occurred more often in the forex (FX) market, although the development of the continuous linked settlement system has lessened the frequency of these occurrences.

In financial markets, clearing houses will impose margin requirements on traders in order to mitigate default risk.

In real estate, there are several hurdles buyers and sellers must overcome in order to successfully settle the transaction. A home inspection could show expensive defects, the title search could reveal problems with legal claims to the property, or the buyer's financing could fall through. These issues are just a few of the challenges that pose a risk to the successful completion of a property sale.