Trade settlement refers to the completion of an agreed upon transaction. It's the process where the selling party delivers a security or financial instrument, and the buying party provides the agreed payment. Settlement ensures that the obligations of all parties involved in the transaction are fulfilled. There are two general types of settlement methods that define how exactly securities and payments are exchanged between parties. Delivery versus payment, or DVP mandates that the delivery of securities only happens if there is a corresponding payment, which significantly reduces the risk of loss to both parties as a result of a counterparty not fulfilling their obligations. Delivery free of payment, in the free of payment or FOP method, the securities and payment transactions are handled separately. This is a potentially risky method for whoever delivers first, as the counterparty might not fulfill their obligations.

Another integral part of clearing and settlement is netting, especially in markets where participants execute multiple trades in a day. It can become inefficient to settle each trade individually. Here's where netting comes into play. Instead of settling every trade separately, netting consolidates multiple trades, allowing market participants to settle just the net amount of their obligations. For instance, if a market participant bought 100 shares in the morning and sold 50 of the same shares in the afternoon, they would only need to settle for the net purchase of 50 shares. This reduces operational costs, minimizes complexity, and ensures the efficient use of capital.