Accelerating Trades: The Impact of Moving from T+2 to T+1 Settlement Cycle in U.S. Financial Markets

How long does it take between the date you buy a security (“transaction date”) and the date it shows up in your account (“settlement date”)? Or, if you sell a security, how long does it take between the date you sell the security and the date the money shows up in your account?

Two days, you say?

Not anymore.

On February 15, 2023, the Securities and Exchange Commission (SEC) adopted a rule shortening the standard securities “settlement” — the time it takes for the transfer of money and securities to reach the appropriate buyer/seller — from two (2) days (known as “T+2”) to one (1) day (known as “T+1”). 

Under the new rule, all transfers of securities affected by the rule (see below) will settle within one business day of their transaction date. 

For all securities transactions that this new “settlement cycle” applies to, the rule goes into effect on May 28, 2024. 

From T+2 to T+1.

Concerning the purchase and sale of securities, the “settlement cycle” of a security refers to the time it takes for the official transfer to be completed. In other words, the time it takes for the security to get to the buyer’s account, and the money to get to the seller’s account.

Before 1993, the settlement cycle for most securities was 5 business days (“T+5”). Then, in 1993, the SEC shortened it to 3 days (“T+3”). In 2017, the SEC shortened it again. This time the cycle went from 3 business days to 2 (“T+2”). Now, according to the new rule effective on May 28, 2024, the settlement cycle will be reduced once more: from T+2 to T+1.

The new T+1 rule applies to:

• stocks

• bonds

• ETFs

• municipal securities

• some mutual funds

• limited partnerships that trade on exchanges.

What the new rule does not change is the ability of the parties to a transaction to agree to a different settlement date. However, any such agreement must be expressed and must be done at the time of the transaction. 

Why a shorter settlement cycle?

Why does the SEC keep shortening the settlement cycle?

According to the SEC, there are basically two reasons:

1. Risk reduction, and

2. Increased operational efficiency in the securities market.

Reducing risk to protect investors is the main reason why the SEC deems it important to shorten the settlement cycle for securities. As the old English proverb puts it, “there’s many a slip ‘twixt the cup and lip,” meaning (in the context of securities) that the longer a transaction takes to settle, the higher the risk that either the money or the security will not be there. So, shorter settlement cycles are better for risk reduction. Risk reduction provides greater protection for investors.

Likewise, shorter settlement cycles improve the efficiency of the securities market. Some of the benefits of shortening the settlement cycle to T+1 expressed in the comments the SEC received to the proposed move to T+1 included, (were not limited to): increased financial stability, improved capital liquidity, and reduced systemic risk in the financial system.

The view of many in the financial industry is that reducing the trade settlement cycle reduces operational costs, market risks, and counterparty risks while increasing market liquidity and allowing for more efficient use of capital. In addition, recent events such as COVID-19 and the 2021 “meme stocks” have highlighted the issue of market volatility — making shorter settlement cycles more desirable.

What will the impact of shorter settlement cycles be?

For the most part, experts believe that retail investors will not notice much of a difference once the T+1 rule goes into effect. On the other hand, certain customers will need to be aware that the new rule may have some ramifications for them. For example, in online trades where a customer uses automated clearing house funds (ACH) for payment, it is important to be aware that the T+1 rule could mean that payments will be made sooner than previously. In other words, customers may not be able to rely solely on the funds coming out of the ACH. This is because the T+1 transaction may settle before the funds clear the ACH. Thus, customers should be certain to maintain sufficient funds in their accounts.  

It appears that the most pressure from the new rule will fall on those individuals and entities that prepare and process security transactions. Thus, it is expected that the brunt of the impact will be felt by issuers, underwriters, brokers, clearinghouses, and other institutions. To be ready for the change that shorter settlement cycles will bring, some companies may need to increase their budgets or add technology to automate their processes. Others will want to hire more staff. 

The other main area in which the move from T+2 to T+1 will be felt is in cross-border or international investments. For financial institutions that trade globally or in different time zones, shortening the settlement time may very well create a series of problems for both investors and issuers.

Finally, the SEC will continue to evaluate the possibility of moving to a T+0 (real-time or same-day) settlement standard cycle in the future.

Technology and innovation in the financial space are moving at lightning speed. And the SEC is constantly updating and amending its rules to keep up with those changes. All industry players need to be ready to move with the SEC and its regulatory changes — fast.

At VerifyInvestor.com, we recognize the regulatory hurdles that both issuers and investors must navigate. Regulations such as Rule 506(c) require issuers to confirm the accredited status of investors, a task that can be challenging to manage independently. To address this, we provide top-tier accredited investor verification services. Our services at VerifyInvestor.com are designed to be fast, efficient, cost-effective, confidential, and reliable, ensuring that companies can seamlessly and fully comply with their legal obligations to verify accredited investors.