The Securities and Exchange Commission (SEC) is changing how a lot of companies do business in one important way. A change to trade settlement rules has been in the works for the past three years, but the SEC officially adopted the changes in February of last year. This past week, the changes started going into effect. The change we’re talking about is moving from a T+2 standard settlement cycle to T+1.
Here’s what you need to know:
Before diving into the specifics of the change, let's clarify what settlement means. When you buy or sell a security in the public markets, settlement is the "official" transfer of securities and money. Since 2017, the standard settlement time for most security transactions has been T+2 (aka, trade date plus two business days). This means that if you purchase stock ABC on Monday, the transaction settles on Wednesday. During this interregnum, the delivery of the stock into your account and the payment for the stock out of your account are finalized.
Starting May 28, 2024, the settlement cycle was shortened to T+1. This means that the same transaction in stock ABC if made on Monday, will now settle on Tuesday. This reduction from two days to one day might sound minor, but it represents a significant shift in how the financial industry operates.
Despite what we anticipate to be a smooth transition given the technological advancements we just mentioned, the first few days and weeks after the change will be crucial. Broker-dealers should closely monitor trades to ensure settlements occur as expected. This heightened vigilance is necessary to address any unforeseen issues promptly and to maintain confidence.
The transition to T+1 will affect various security types, including:
While the shift to T+1 is largely facilitated by existing technology, it’s wise to stay informed and vigilant.
The SEC's move to shorten the settlement cycle from T+2 to T+1 marks a significant step towards a more efficient and secure financial market. By reducing risk and increasing liquidity, this change is set to benefit investors and the market as a whole. As we navigate this new phase, staying informed and prepared will ensure a smooth transition and help you navigate the new landscape confidently.
For more details, you can refer to the SEC's official documentation and the DTCC's resources here and here.
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