Understanding Settlement Cycles: What Does T+1 Mean for You?

Did you know there’s a difference between the date you trade a security and the date the transaction settles? Trade date is the day your order to buy or sell a security is executed; settlement date is the day your order is finalized and on which funds and the securities must be delivered. Currently, settlement date occurs two business days after trade date, but recent rule amendments from the Securities and Exchange Commission (SEC) and conforming FINRA rule changes will soon make that cycle one day shorter.

Beginning on May 28, 2024, the new standard for settlement will become the next business day after a trade, or T+1.

This isn’t the first time such a change has occurred. In 2017, the SEC shortened the settlement cycle from T+3 to T+2. The move to T+1 reflects improvements in technology that allow trades to settle more quickly. With most trading and banking activity occurring online, extra days to physically deliver securities or funds are no longer needed.

The Change to T+1

So, what does this change mean for you? Currently, if you buy a security such as a stock or bond, your full-service or online brokerage firm must receive payment from you no later than two business days after the trade is executed. When you sell a security, you must deliver your security to the brokerage firm no later than two business days after the sale. For example, if you sold shares of a stock on Tuesday, the transaction would settle on Thursday.

Under the new T+1 settlement cycle, most securities transactions will settle on the next business day following their transaction date. Using the example from above, if you sell shares of a stock on Tuesday, the transaction will now settle on Wednesday.

You might not notice a change, as many brokerage firms currently require investors to have the needed funds in cash accounts before making a purchase. But if you normally initiate an Automated Clearing House (ACH) payment for your purchases the day after your trade is executed (e.g., you wait for trade confirmation before sending money from a linked bank account), you’ll likely need to make payments a day earlier under the T+1 cycle to ensure the payment has posted by settlement date. Simply initiating an ACH transaction doesn’t meet payment requirements; the funds must be deposited in your brokerage firm’s bank account. 

The SEC cautions that if you hold a physical, paper securities certificate, you might need to deliver it to your broker-dealer earlier to meet the new shorter settlement cycle. However, it’s increasingly rare for investors to hold paper securities certificates.

If you hold your securities in an electronic format with your broker-dealer, your broker-dealer will deliver the securities on your behalf one day earlier under the new rule. You should contact your broker-dealer about any changes that may specifically affect you or your account.

The T+1 rule amendment applies to the same securities transactions currently covered by the T+2 settlement cycle. These include transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds and limited partnerships that trade on an exchange. The switch to T+1 also means that these transactions will align with the settlement times for options and government securities, which currently operate on a next-day settlement schedule.

Additionally, even though margin requirements in margin accounts are computed on a trade-date basis and aren’t changing, the payment period for Regulation T (initial) margin calls also has been reduced by one day to T+3. This means that the change in settlement date doesn’t change the time periods related to meeting maintenance margin calls, as these are set based on the date the call occurred.

FINRA is dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

Photo Credit: @istockphoto.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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