Execution, Validity, and Clearing Instructions

Updated for the 2026-2027 CFA® Level I curriculum.

Every trade order carries three types of instructions. Execution instructions tell the market how to fill the order. Validity instructions tell the market when the order can be filled. Clearing instructions tell the market how to settle the trade once it executes. Level I questions test whether you can read a short order scenario and correctly label which instruction type is in play.

Key Takeaways About Execution, Validity, and Clearing Instructions

• Execution instructions control how an order gets filled, including price limits and disclosure of order size.

• Validity instructions control when an order can be filled or must expire.

• Clearing instructions control who processes and settles the trade after execution.

• A single order can carry instructions from all three categories at once.

• Immediate-or-cancel (IOC) and fill-or-kill (FOK) are validity instructions, not execution instructions, even though they affect execution timing.

• Give-up arrangements let an executing broker route settlement to a different clearing broker.

• Level I questions usually test classification, not calculation, for this LOS.

What You Need to Know for CFA Level I

• Define execution instructions and name the common types.

• Define validity instructions and name the common types.

• Define clearing instructions and explain what they specify.

• Read a short order scenario and identify which instruction type applies.

• Distinguish validity instructions from execution instructions when both affect timing.

• Recognize that clearing instructions are about settlement, not price or timing.

Execution Instructions

Execution instructions tell the market how to fill an order once it reaches the market. They cover price conditions and disclosure conditions.

Common execution instructions include:

• Market order. Execute immediately at the best available price. No price limit.

• Limit order. Execute only at a specified price or better.

• All-or-nothing (AON). Fill the entire order size or none of it.

• Hidden order. Do not display the order in the public order book.

• Iceberg (reserve) order. Display only a portion of the total order size, hiding the rest.

• Not-held order. Give the broker discretion over price and timing to seek a better fill.

These instructions answer one question: at what price and with what visibility should this order execute?

Validity Instructions

Validity instructions tell the market when an order becomes active and when it expires. They do not set a price. They set a time boundary or a fill-or-cancel condition.

Common validity instructions include:

• Day order. Valid only for the current trading session. Cancels automatically at the close if unfilled.

• Good-till-cancelled (GTC). Stays active until the trader cancels it or it hits a broker-imposed limit.

• Immediate-or-cancel (IOC). Execute whatever portion is possible immediately. Cancel the rest.

• Fill-or-kill (FOK). Execute the entire order immediately or cancel it completely.

• Good-on-close. Execute only at the closing price of the session.

• Good-on-open. Execute only at the opening price of the session.

A useful test: if the instruction changes when the order can act rather than at what price it fills, it is a validity instruction.

Clearing Instructions

Clearing instructions specify how a trade settles after it executes. They identify the broker or clearing firm responsible for confirming the trade, transferring securities, and moving cash.

Most retail orders route settlement through the same broker that executed the trade. Institutional trades often use a give-up arrangement. In a give-up, the executing broker fills the order but "gives up" the trade to a separate clearing broker named by the client. This lets an institution use one broker for execution quality and another for custody or settlement relationships.

Clearing instructions matter because execution and settlement are separate functions. A trade can execute perfectly and still require a specific clearing path to settle correctly.

How to Classify an Instruction from a Trade-Order Scenario

Exam scenarios describe an order in plain language and ask you to identify the instruction type. Use this three-question process:

1. Does the detail set a price or disclosure condition? If yes, it is an execution instruction.

2. Does the detail set a time window or a fill-now-or-cancel condition? If yes, it is a validity instruction.

3. Does the detail name who settles the trade or how it settles? If yes, it is a clearing instruction.

Worked Example

A portfolio manager places an order to buy 50,000 shares of a mid-cap stock. The order instructs the broker to buy at $42.00 or better, fill the entire order immediately or cancel it, and settle through the fund's designated custodian bank rather than the executing broker.

Step 1: Identify the execution instruction.

"Buy at $42.00 or better" sets a price condition. This is a limit order, an execution instruction.

Step 2: Identify the validity instruction.

"Fill the entire order immediately or cancel it" is a fill-or-kill (FOK) instruction. This sets a time and completeness condition, not a price condition.

Step 3: Identify the clearing instruction.

"Settle through the fund's designated custodian bank rather than the executing broker" is a give-up arrangement. This is a clearing instruction because it names who handles settlement.

Plain-English interpretation: This single order combines all three instruction types. The price condition (limit) is execution. The all-or-nothing timing condition (FOK) is validity. The custodian routing is clearing. A Level I question could isolate any one of these three details and ask you to classify it correctly.

Common Exam Traps

• Confusing IOC and FOK with execution instructions. Both affect execution timing, but they are validity instructions because they set a time and completeness rule, not a price rule.

• Memorizing the label without applying it to the facts. A question may describe fill-or-kill behavior without using the term "FOK." You must recognize the behavior, not just the acronym.

• Treating give-up arrangements as an execution detail. Give-up arrangements affect settlement, not the price or timing of the fill. They are clearing instructions.

• Assuming an order can only carry one instruction type. Most real orders combine execution, validity, and clearing instructions at once, as shown in the worked example.

Practice Question

An institutional trader submits an order with these terms: buy 10,000 shares at the market price, execute whatever is available in the next 10 seconds and cancel the remainder, and settle the trade through the firm's prime broker rather than the executing broker.

Which instruction type applies to the phrase "cancel the remainder" after the 10-second window?

1. Execution instruction

2. Validity instruction

3. Clearing instruction

FAQs About Execution, Validity, and Clearing Instructions