On May 28 the Securities and Exchange Commission (SEC) implemented a newly adopted rule which shortened the standard settlement cycle for most broker-dealer transactions from two business days (T+2) to one business day after the trade date (T+1).1
When the settlement cycle was first implemented in 1993 most broker-dealer transactions were governed by the SEC’s three business day cycle, referred to as T+3. SEC experience has shown that shortening the settlement cycle “benefits investors and reduces the credit, market, and liquidity risks in securities transactions faced by market participants.”2
Retail investors who sell a stock through a broker usually get a confirmation of the trade right away, but the actual “settlement” does not occur until there is official delivery of both securities and money between the two parties.3 Prior to May 28, the settlement had to occur within two days which accounted for the time it took for the stock to be transferred from the seller’s portfolio to the buyer’s portfolio and for the cost of the stock to be deducted from the buyer’s account and sent to the seller’s account.
Now, those activities have to occur within one day for most broker-dealer transactions. For example, under the new T+1 settlement cycle, if you sell shares of a stock on Monday, the transaction has to settle by Tuesday. Investors will get proceeds from selling a security faster and will have to have their funds ready when they buy securities.4
Also, if you hold your securities certificates you will have to deliver the ones you are selling to your broker-dealer earlier than in the T+2 cycle. The T+1 settlement cycle may affect certain provisions in margin account agreements, so it is best to consult your broker-dealer to determine any changes that may be required for those margin account transactions.5
The newly revised settlement cycle includes transactions for stocks, bonds, municipal securities, exchange-traded funds, and limited partnerships that trade on an exchange.6 Those securities that meet the terms of the SEC’s 1995 exemption order for foreign securities are exempt from the standard settlement cycle.7
As was in force in prior settlement cycles, both parties to a transaction can agree at the time of the transaction to extend the settlement period as long as they comply with paragraph (a) or (d) of SEC Rule 15c6-1. 8
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1, 2 SEC Chair Gensler Statement on Upcoming Implementation of T+1 Settlement Cycle, 5/21/2024
Link: https://www.sec.gov/news/press-release/2024-62
3, 4 The SEC’s T+1 Settlement Rule will Transform Stock Tracing: Here’s What You Need to Know by Gordon Gottsegen, 5/27/2024
Link: https://www.msn.com/en-us/money/savingandinvesting/the-sec-s-t-1-settlement-rule-will-transform-stock-trading-here-s-what-you-need-to-know/ar-BB1mQhZJ?ocid=BingNewsSerp
5, 6 New “T-1” Settlement Cycle – What Investors Need to Know: Investor Bulletin, 3/27/2024
Link: https://www.sec.gov/oiea/investor-alerts-and-bulletins/new-t1-settlement-cycle-what-investors-need-know-investor
7, 8 Shortening the Securities Transaction Settlement Cycle: Frequently Asked Questions
Link: https://www.sec.gov/exams/educationhelpguidesfaqs/t1-faq