Date Bases for Finance

Securities processing involves the use of multiple date bases. There are two underlying concepts for date bases:contractual terms and accounting control. Understanding them makes the entire topic straightforward.

We'll start with the example. A trade is made on 6/01 to purchase a TBill, with settlement on 6/04. It is corrected on 6/02 due to an incorrect price entered on 6/01. It settles on 6/04 via a Receive, which captures the receipt of the securities and the sending out of money.
In addition to trade date and settlement date, we use the term effective date to describe the date that an action is entered into the system. The effective date of the trade is 6/01, as it was entered into the system on that date. The correction has an effective date of 6/02. The receive has an effective date of 6/04.

The contract is binding as of the trade date. This is the reason trade date reportingis important.

The settlement date is when ownership changes hands, regardless of whether the transaction actually settles.
It is this ownership aspect of the settlement date that makes settlement date reporting important. It is also the reason that, from a purely financial point of view, fails to receive are always good: you get the benefits of ownership without having to pay anything. Likewise, fails to deliver are always bad financially (there are other considerations, of course).

Trade-Effective Date (TE)
    The TE date is the greater of the trade date and effective date. When people in the business say "trade date basis", this is what they mean.
Settlement-Effective Date (SE)
    The SE date is the greater of the settlement date and effective date. When people in the business say "settlement date basis", this is what they mean.

ED(effective date) is useful because control is performed on a day-to-day basis, and it is natural to ask what was done on a given day. On the other hand, since effective date is almost always the same as or later than trade date, TE amounts can usually be used to serve the control purpose as well. You would want an exception report in that case that shows Register items where effective date is less than trade date.

SD is useful because it is the accurate record of security ownership. You may not pick up coupon and dividend payments correctly if you rely on SE. Funding and cost of carry will also be incorrect. The tradeoff is that having both SD and SE will naturally lead to control and reconciliation efforts that might not be worth the additional effort.


Reference Link:
http://webcache.googleusercontent.com/search?q=cache:NSy5nM63KnYJ:eclipsesoftware.biz/PositionsAndBalances.html+settlement+date+position&cd=1&hl=en&ct=clnk&gl=us&source=www.google.com
http://eclipsesoftware.biz/PositionsAndBalances.html.