Starting Tuesday, the day after Memorial Day, the Securities and Exchange Commission (SEC) will begin implementing T+1 settlement. In a nutshell, this implies investors will give you the chance to trade stocks faster through their brokers and get withdrawals more quickly.
What’s T+1 settlement?
On this case, “settlement” refers back to the means of buying and selling stocks, specifically the transfer of securities to the client’s account and money to the vendor’s or broker’s account.
Prior to 1993, it could take as much as per week to settle trades — until the SEC established T+3 settlement, which implies it took three business days to settle a transaction.
In 2017, the SEC shortened it to T+2, or two days to settle a transaction. That has been the usual until now, because the SEC voted in February to shorten the cycle even further with T+1 settlement. That change officially begins on May 28 within the U.S. In Canada and Mexico, it starts a day earlier, May 27.
Previously, for those who sold shares of a stock on a selected day through your broker or an internet trading platform like Robinhood, the transaction would settle in two business days. Starting Tuesday, for those who sell shares in a stock, it’ll settle the subsequent business day.
“For on a regular basis investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday,” SEC Chair Gary Gensler said. “Shortening the settlement cycle also will help the markets because time is time and money is risk. It’ll make our market plumbing more resilient, timely and orderly. Further, it addresses one in all the 4 areas the staff advisable the Commission address in response to the GameStop stock events of 2021.”
The brand new T+1 cycle will apply to the identical investments because the T+2 cycle did, that are stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds and limited partnerships that trade on an exchange.
The industry is prepared
The Securities Industry and Financial Markets Association (SIFMA), which represents broker-dealers, has been instrumental in implementing the move to T+1 settlement, working with federal regulators and industry on it since 2020. Tom Price, managing director and head of technology, operations and business continuity for SIFMA, said the industry is prepared.
“As we head into transition weekend and make final preparations for the move from T+2 to T+1 settlement, SIFMA’s members, together with our partners ICI and DTCC, have committed the time and resources to organize, and that provides us a high degree of confidence as we proceed with the transition. We might be engaging in communications with the industry over the approaching weekend and can assess how the work goes and address any issues which arise. Monday we are going to look to Canada, Mexico and Argentina as those countries move to T+1, and on Tuesday May 28, we might be ready for the market open on the effective date of the U.S. transition,” Price said.
Price cited several advantages of shortening the time period between the trade date and settlement date for broker-dealers and investors. First, fewer days from trade to settlement reduces risk within the system.
Second, faster settlement means lower day by day average capital requirements, so firms can put that capital to higher use. Further, it increases liquidity within the system. As well as, he said it’ll help drive innovation and automation and process improvements.
“There’s a profit to streamlining operations, and to realizing greater efficiencies and making our operational systems more modern and resilient,” Price stated.