John E. Chapman
Chief Executive Officer
Numerous rules and regulations govern the trading of securities on the public markets. One such example pertains to the settlement cycle for all trading activity. This cycle is a complex and critical component of financial markets, ensuring that trades are completed accurately and timely, thus maintaining market stability and investor confidence.
Effective May 28, 2024, the SEC has shortened the cycle to what is referenced as “T+1”.
When an investor buys or sells securities, “settlement” refers to the official transfer of securities to the buyer’s account and the cash to seller’s account. Since 2017, the settlement cycle – the time between the transaction date and the settlement date – for most securities transactions has been two business days – often referred to as “T+2.” Under “T+2,” if an investor sold shares of ABC stock on Monday, the transaction would settle on Wednesday.
If an investor buys securities subject to the new “T+1” settlement cycle, they must pay for the securities transactions one business day earlier. For example, if an investor sells shares of ABC stock on Monday, the transaction will settle on Tuesday. Similarly, if the investor holds their securities in a brokerage account, the broker-dealer will deliver the securities on their behalf one day earlier. If the transaction involves the use of margin, the “T+1” settlement cycle may impact certain provisions of the margin agreement.
The “T+1” settlement cycle will apply to the same securities transactions 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 trend towards shorter settlement cycles (e.g., moving from T+3 to T+2) aims to reduce risk and increase efficiency. Emerging technologies like blockchain are being explored to potentially revolutionize the settlement process by providing faster, more transparent, and more secure mechanisms for settling trades.
