Shortened Settlement Cycle T+1

In 2017, the standard settlement cycle for securities traded on the secondary markets in the United States was shortened to trade date plus two business days, commonly referred to as T+2. Since that time, there have been additional recommendations and discussions surrounding accelerating the trade settlement cycle further to trade date plus one business day (T+1). Reducing time between the execution of a securities transaction and its settlement reduces risk, promotes investor protection, and increases operational and capital efficiency. All these potential vulnerabilities in the market have been highlighted from time to time, particularly with events like the outbreak of COVID-19 in March 2020. Thus, the Securities and Exchange Commission (“SEC”) has now adopted rule amendments to officially shorten the settlement cycle to T+1 with an industry Go Live date of May 28, 2024.

Vision Financial Markets has participated in industry working groups that have been testing this development, monitors updates from DTCC and others and will be ready for T+1 implementation on May 28, 2024. Vision has taken the necessary steps to comply with the amended rule and is committed to working with our clients to ensure a seamless transition for your business.

The shortened settlement cycle T+1 | How it will impact you.

On May 28, 2024, the financial industry plans to shorten the settlement cycle process that underlies a significant volume of U.S. financial activity. Specifically, the settlement cycle will shorten from T+2 to T+1 for most products including but not limited to equities, corporate bonds, municipal bonds, and ETFs. This change will reduce several risks for individual investors and the financial markets as a whole, including credit risk, market risk, liquidity risk, and systemic risk.

What is a securities settlement cycle?

When an owner of a security sells that security to a buyer at an agreed price or a person seeking to buy a security finds an owner of that security who agrees to sell it at an agreed price, this transaction is called an “execution.” The execution begins the process by which the buyer gives the agreed amount of money to the seller and the seller transfers the ownership of the security to the buyer by the terms of their agreement through intermediaries. This process, called the “settlement cycle,” involves careful coordination among numerous intermediaries and significant market infrastructure, all of which ensure that payments are made and securities are safely transferred to rightful owners. Currently, the U.S. securities industry completes the settlement cycle for most products on T+2.

Why is the settlement cycle shortening to T+1?

The goal of shortening the settlement cycle from the current trade date plus two days to trade date plus one day is to reduce risks in the financial system. Risk is a function of time (i.e., the greater the time between a trade execution and settlement, the greater the risk to the parties). During the settlement cycle, there is a risk that an intermediary representing buyers or sellers may experience financial stress that would create difficulties in that intermediary fulfilling its trade settlement obligations. The shorter the settlement cycle time, the smaller the risk to buyers and sellers (including individual investors), and the market generally. With the large daily volume of trading in the U.S. financial markets, the change from T+2 to T+1 will increase the safety and soundness of our financial system and directly benefit investors and other market participants.

When will the settlement cycle change?

The industry plans to move to the shorter settlement cycle on May 28, 2024. Stakeholders across the U.S. financial sector, including broker-dealers, market infrastructures, and vendors, as well as industry regulators, are fully coordinated and are planning and preparing for the move to T+1.

After the industry completes the move from T+2 to T+1, certain processes related to your trading activity will change. Most notably, you will:

  • receive payment faster following a sale of a security; and
  • be required to provide funds more promptly to your broker following the purchase of a security.
    • The implementation of T+1 settlement will also affect the due date of certain margin calls (cash calls and initial calls). These calls will now be due within 3 business days (rather than 4). Maintenance calls and day trade calls will remain due within 4 business days. Vision will continue to contact you with the details of any open margin calls.

Additional information about T+1 settlement can be found below in the following industry links:

T+1 Industry Implementation Playbook – SIFMA – T+1 Industry

Implementation Playbook – SIFMA UST1 FAQs | DTCC