I just got off the phone with a GIPS(R) (Global Investment Performance Standards) verification client, who is trying to reconcile the settlement and trade date sides of trading.

On trade date, they don’t have the cash necessary to make a purchase; but, by settlement date they will have it. From a settlement date perspective, they don’t care that the cash isn’t there, knowing that by settlement date, the cash will appear. However, from the trade date perspective, we need the cash (or, as Cuba Gooding would put it, “show me the money!”).

In performance measurement, I think it’s fair to say that we don’t care about settlement. Of course, in our hearts we do, but not in our returns.

In order to pull this off, we need to create cash on trade date. Ideally, we post a fictitious transaction that brings the necessary cash in for the trade, which will be picked up by our return formula (e.g., Modified Dietz). When the cash finally arrives, we need an offsetting cash transaction, so that the two cancel out. We can call the trade date event a “pseudo cash” transaction, or an “anticipated cash” position, or whatever you wish, but something is needed.

Thoughts?