what it means to you

Starting Tuesday, the day after Memorial Day, the Securities and Exchange Commission (SEC) will implement T+1 settlement. Simply put, this means investors can trade stocks faster and withdraw them faster through a broker.

What is T+1 payment?

“Settlement” in this case refers to the process of buying and selling stocks, specifically the transfer of securities to the buyer’s account and cash to the seller’s or broker’s account.

Before 1993, transactions could take up to a week to settle. Until the SEC established T+3 settlement, transactions took three business days to settle.

In 2017, the SEC reduced the time it takes to settle a transaction to T+2, or two days. This has been the norm so far, as the SEC decided to further shorten the cycle with T+1 settlement last February. The change officially begins May 28 in the United States, and a day earlier in Canada and Mexico, on May 27.

Previously, if you sold stocks on a certain date through your broker or online trading platform like Robinhood, your trade would settle within two business days. If you sell stocks starting Tuesday, they will be settled the next business day.

“For the average investor who sells stocks on Monday, shortening the settlement cycle will allow them to get their money on Tuesday,” SEC Chairman Gary Gensler said. “Time is money and time is risk, so shortening payment cycles will also help the market. This will make the plumbing of our markets more resilient, timely and orderly. It also addresses one of four areas where staff recommended committee addresses in response to the 2021 GameStop stock event.”

The new T+1 cycle applies to the same investments as the T+2 cycle, including stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds and exchange-traded limited partnerships.

The industry is ready

The Securities Industry and Financial Markets Association (SIFMA), which represents broker-dealers, has been instrumental in working with federal regulators and industry since 2020 to implement the transition to T+1 settlement. Tom Price, Managing Director and Head of Technology, SIFMA, Operations and Business Continuity, said the industry was ready.

“As we approach the transition weekend and make final preparations for the transition from T+2 to T+1 arrangements, SIFMA members, along with our partners ICI and DTCC, have invested time and resources in preparation, which is delivering great results for us. The level of confidence you have as you go through the transition. We will be engaging with the industry over the coming weekend to assess how work is progressing and address any issues that arise. On Monday we will look at Canada, Mexico and Argentina as they transition to T+1, and on Tuesday May 28th we will prepare for the markets to open on the effective date of the U.S. transition,” Price said.

Price noted several benefits for broker-dealers and investors by shortening the period between trading and settlement dates. First, the number of days it takes from transaction to settlement is reduced, reducing risk in the system.

Second, faster payments lower average daily capital requirements, allowing businesses to better utilize that capital. It also increases the liquidity of the system. It will also help drive innovation, automation and process improvements, he said.

“There are benefits to streamlining operations, realizing greater efficiencies, and making operating systems more modern and resilient,” Price said.