Understanding the Settlement Cycle: What Does T+1 Mean to You?

Did you know that there is a difference between the date you trade a security and the date the trade is confirmed? A trading day is the day on which an order to buy or sell a security is executed. The settlement date is the day your order is confirmed and the funds and securities must be delivered. The current settlement date is 2 business days from the transaction date. However, recent regulatory amendments from the Securities and Exchange Commission (SEC) and changes to FINRA rules will result in that cycle becoming one day shorter.

From May 28, 2024, the new settlement criterion will be the next business day after the transaction, i.e. T+1.

This is not the first time this change has occurred. In 2017, the SEC shortened the settlement cycle from T+3 to T+2. The transition to T+1 reflects technological improvements that allow transactions to be settled more quickly. Since most trading and banking activities take place online, there is no longer any additional time required to physically deliver securities or funds.

Change to T+1

So what does this change mean to you? Currently, if you purchase securities such as stocks or bonds, a full-service firm or online brokerage firm must receive payment from you within two business days after the transaction is completed. If you sell securities, you must deliver the securities to the brokerage firm within two business days of the sale. For example, if you sell stock on Tuesday, your transaction will be settled on Thursday.

Under the new T+1 settlement cycle, most securities transactions will be settled on the business day following the trade date. Using the example above, if you sell a stock on Tuesday, your trade will now be settled on Wednesday.

Many brokerage firms now require investors to have the required funds in a cash account before making a purchase, so you may not notice the change. However, if you typically initiate Automated Clearing House (ACH) payment for your purchase the day after the transaction is executed (for example, we will wait for transaction confirmation before sending money from your linked bank account.) You may need to pay a day early depending on the T+1 cycle to ensure that your payment is cleared by the due date. Simply initiating an ACH transaction is not enough to meet your payment requirements. The funds must be deposited into the brokerage firm’s bank account.

The SEC warns that if you hold physical paper securities certificates, you may need to deliver them to your broker-dealer earlier to meet the new shortened settlement cycle. However, it is becoming increasingly rare for investors to hold paper securities certificates.

If you hold your securities electronically with a broker-dealer, your broker-dealer will deliver the securities on your behalf one day in advance under the new regulations. You should contact your broker-dealer for any changes that may specifically affect you or your account.

The T+1 rule amendments will apply to transactions in the same securities currently covered by the T+2 settlement cycle. This includes trading in stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships traded on exchanges. The transition to T+1 also means that these transactions will now align with the settlement times for options and government securities that operate on next-day settlement schedules.

Additionally, the margin requirements for margin accounts are calculated based on the trading day and remain unchanged, but the payment period for Regulation T (initial) margin calls has also been shortened by one day to T+3. This means that changes to your payment date will not change the time period associated with your maintenance margin call meeting. This is because it is set based on the date the call occurred.