T+2
In financial markets, the terms T+1, T+2, etc., are a shorthand for trade date plus one day, trade date plus two days, etc., indicating how many business days after a security transaction occurs that the trade must be settled. Rules or customs in financial markets for securities transactions provide for this 'settlement period', which is the mandated time for official transfer of securities to the buyer’s account and the cash to seller’s account.[1] The most common current settlement period for securities transactions is one business day after the day of a transaction, which is abbreviated to T+1. On settlement, the seller must produce the security's certificate and executed share transfer form in exchange for payment from the purchaser. Many countries now dispense with the requirement that a physical stock certificate be produced, a process known as dematerialization, and have adopted electronic settlement systems.
Similarly, T+2 means the previous convention of trade date plus two days, T+3 means three days, etc.
History[edit]
During the 1700s the Amsterdam Stock Exchange had close links with the London Stock Exchange and they would often list each other's stocks. To clear the trades, time was required for the physical stock certificate or cash to move from Amsterdam to London and back. This led to a standard settlement period of 14 days which was the time it usually took for a courier to make the journey on horseback and by ship. Most exchanges continued to use the same model over the next few hundred years.[citation needed]
Settlement procedures varied considerably across national stock markets. There were two main types of settlement period used by different countries, either a fixed number of days after the transaction known as fixed settlement lag or periodically on a fixed date when all transactions up to that date are settled known as fixed settlement date.[2] In France, Italy, and, to some extent, Switzerland and Belgium, as well as some developing countries, the settlement of all transactions took place once a month on a fixed date. This system was instituted by Napoleon. The last day of trading on which all trades are settled was called the liquidation. The liquidation took place on the seventh business day preceding the end of the calendar month.[2]
In the United States, the New York Stock Exchange used T+1 in the 1920s, and the American Stock Exchange used T+2 prior to 1953.[3] These settlement periods were gradually extended to T+5 by the late 1960s as brokerage firms became overwhelmed by the massive volume of securities transactions paperwork awaiting settlement.[4]
T+3[edit]
The Black Monday (1987) stock market crash[3] prompted a move to reduce settlement times. Settlement dates in most exchanges reduced to three days (T+3).[3]
T+2[edit]
In 2017, the move by most stock exchanges was towards adoption of T+2 (trade date plus two days). For example, the United Kingdom adopted T+2 in October 2014 and the United States adopted T+2 in September 2017.[5][6]
T+1[edit]
Indian stock exchanges planned a move to T+1 starting in 2022.[7] The US and Canada targeted a transition to T+1 early in 2024.[8] Canada adopted T+1 beginning on May 27, 2024, and the US the following day.
Operation[edit]
Under a one-day settlement rule (T+1), settlement occurs on the business day following the transaction date. Saturday, Sunday and public holidays are not market business days. For example, if a transaction occurs on a Friday, the payment or check must arrive at the broker's office by the close of business on Monday, unless a public holiday delays the settlement day.[9]
The rationale for the delayed settlement is to give time for the seller to get documents to the settlement and for the purchaser to clear the funds required for settlement.
Application[edit]
The two-day settlement period applies to most security transactions, including stocks, bonds, municipal securities, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange.[10] Two-day settlement has also been the convention in the off-exchange foreign exchange market well before exchanges moved to this convention.
Government securities, stock options, and options on futures contracts settle on the next business day following the trade or T+1. Futures contracts themselves settle the day of the trade.
References[edit]
- ^ "New "T+1" Settlement Cycle–What Investors Need To Know: Investor Bulletin". United States Security and Exchange Commission. March 27, 2024. Retrieved May 28, 2024.
- ^ a b Jordan Vassilev Jordanov (September 1998). "The Size Anomaly in the London Stock Exchange. An Empirical Investigation" (PDF). pp. 69–70.
- ^ a b c Securities and Exchange Commission (October 13, 1993). "58 FR 52891 Securities Transactions Settlements" (PDF).
- ^ Morris, Virginia B.; Goldstein, Stuart A. (2009). Guide to Clearance & Settlement: An Introduction to DTCC. New York: Lightbulb Press. p. 4. ISBN 9781933569987. Retrieved 20 November 2022.
- ^ Philip Stafford (December 3, 2013). "UK share settlement to be cut to two days".
- ^ "SEC Adopts T+2 Settlement Cycle for Securities Transactions". Securities and Exchange Commission. March 22, 2017. Retrieved August 2, 2017.
- ^ "Stock exchanges to start T+1 settlement cycle from Feb 25, 2022 in phases". Business Standard (India). November 9, 2021. Retrieved November 9, 2021.
- ^ Canadian Securities Administrators (February 3, 2022). "CSA Staff Notice 24-318 – Preparing for the Implementation of T+1 Settlement".
- ^ "Title 17: Commodity and Securities Exchanges. §240.15c6-1 Settlement cycle". Electronic Code of Federal Regulations (eCFR). 29 March 2017. Retrieved 11 April 2021.
- ^ Sarah N. Lynch (March 22, 2017). "SEC shortens settlement cycle for securities trades". Reuters. Retrieved September 6, 2017.
This article incorporates public domain material from About Settling Trades in Three Days. United States Securities and Exchange Commission.
External links[edit]
- EU to reduce settlement time for securities, HSBC (2013)