Key Takeaways
- T+1 means settlement next business day after trade.
- Shorter cycles reduce settlement risk and free capital.
- U.S. shifted from T+3 to T+1 by 2024.
- T+2 and T+3 are older, slower settlement standards.
What is T+1 (T+2, T+3)?
T+1, T+2, and T+3 refer to securities settlement cycles, indicating the number of business days after the trade date (T) when the settlement occurs. The trade date is when a transaction executes, while settlement finalizes the obligation between buyer and seller, transferring ownership and funds.
As of May 28, 2024, the U.S. has adopted T+1 as the standard for most securities, replacing the previous T+2 cycle and significantly reducing settlement risk and capital lock-up.
Key Characteristics
Settlement cycles impact how quickly transactions complete and funds clear. Key points include:
- T+1: Settlement occurs one business day after the trade date, accelerating fund availability and reducing counterparty risk.
- T+2: Previously standard in the U.S. until 2024, still common in Europe and other markets.
- T+3: An older cycle mostly phased out, but may apply to some non-standard securities.
- Excludes weekends and holidays: Settlement counts only business days, skipping non-trading days.
- Regulated by the SEC: Settlement cycles follow rules to ensure market integrity and minimize failure to deliver issues.
How It Works
When you execute a trade, the clock starts on the settlement cycle. Under T+1, the buyer must deliver payment and the seller must transfer securities by the next business day, often handled electronically through broker-dealers and clearinghouses. This quick turnaround enhances liquidity and reduces the time capital is tied up.
Shortening settlement cycles relies on efficient processes and technology to verify trades and clear payments swiftly. This change aligns equities with many fixed income products and options, which have long used T+1.
Examples and Use Cases
Here are practical examples demonstrating settlement timelines and impact:
- Equities: Buying shares of SPY on Monday settles on Tuesday under T+1, while previously it would have settled Wednesday under T+2.
- Bonds: Transactions in municipal bonds like those managed by BND also follow these settlement cycles, improving capital efficiency for fixed income investors.
- ETFs: Many ETFs, featured in our best ETFs guide, benefit from faster settlement, allowing quicker reinvestment and portfolio adjustments.
Important Considerations
With T+1 settlement, you must ensure funds and securities are ready sooner to avoid settlement failures. Brokerages typically handle these processes, but investors should be aware of tighter timelines.
This accelerated cycle reduces counterparty risk but requires robust operational readiness, especially for margin accounts and complex trades. Understanding settlement timing is critical for managing your margin and avoiding unexpected delays or costs.
Final Words
Shortening settlement cycles to T+1 reduces risk and speeds up fund availability, marking a significant shift in U.S. securities trading. Review your portfolio settlement terms and consult your broker to optimize transaction timing under the new standard.
Frequently Asked Questions
T+1 means settlement occurs one business day after the trade date, while T+2 and T+3 mean settlement happens two or three business days later, respectively. These cycles mark when securities and funds are finally exchanged between buyer and seller.
The shift to T+1 reduces settlement risk and speeds up transaction finality by shortening the time between trade execution and settlement. This change leverages technology improvements and aligns equities with options and government securities settlement times.
Most U.S. securities like stocks, bonds, ETFs, and municipal securities follow the T+1 cycle starting May 28, 2024. Some exceptions may apply, but the majority of regular way trades via broker-dealers adhere to this faster timeline.
Settlement counts only business days, so weekends and exchange holidays are excluded. For example, a T+1 trade executed on Friday would settle the following Monday, assuming no holidays intervene.
Before 1993, the cycle was T+5; it shortened to T+3 from 1993 to 2017, then to T+2 from 2017 until May 27, 2024. The current standard is T+1, effective May 28, 2024, reflecting technological advances and risk reduction goals.
T+1 reduces settlement risk by minimizing the time sellers and buyers wait to finalize transfers, freeing up capital faster and lowering the chance of default. This leads to more efficient and secure trading.
Yes, Canada and Mexico adopted T+1 settlement on May 27, 2024. However, many global markets such as the UK and EU still commonly use T+2 settlement cycles.
