Understanding T+1 (T+2, T+3) Settlement Cycles

What “T+X” means

T+X (e.g., T+1, T+2, T+3) denotes the number of business days after the trade date (T) when a securities transaction must settle — that is, when the securities and corresponding cash are exchanged and ownership is officially recorded. Only market open days count; weekends and market holidays are excluded.

Why settlement timing matters

• The settlement date determines when you become a shareholder of record, which affects dividend eligibility and voting rights.
• It governs when buyers must deliver funds and sellers must deliver securities.
• Shorter cycles reduce the window for counterparty or delivery failures (settlement risk).

Recent change: U.S. shift to T+1

As of 2024, U.S. equity markets moved from T+2 to T+1 for most exchange-listed securities. The T+1 standard applies to listed stocks, many exchange-traded funds (ETFs), certain mutual funds and limited partnerships, municipal securities, and many bonds traded on exchanges. The change aligns settlement timing with modern electronic processing and reduces exposure to settlement risk.

Benefits and transition considerations

Benefits:
– Lower settlement and counterparty risk.
– Faster access to proceeds from sales.
– Better alignment with modern technology and cross-border practices.

Considerations:
– Brokers, dealers, and clearing firms needed operational changes; short-term increases in failed trades can occur during transition periods.
– Investors may need to deliver certificates or funds earlier in some rare cases.
– Margin agreements and specific broker procedures may be affected; check with your broker for account-specific implications.

Exceptions and variations

• Some securities and transactions operate on different cycles:
• Certain primary offerings (e.g., IPOs) may use other settlement schedules set by exchanges.
• Many fixed-income instruments, certain money market funds, and U.S. Treasuries may still settle on T+0 or T+1 or otherwise vary.
• Always confirm the settlement terms for the specific security you trade.

Settlement risk (briefly)

Settlement risk — also called delivery risk or Herstatt risk — is the chance that one party fails to deliver cash or securities as agreed at settlement. Shorter settlement cycles help reduce this risk by narrowing the period when obligations remain outstanding.

Example

If you sell 100 shares on Monday under T+1:
– Settlement occurs on Tuesday (assuming no holiday).
– Tuesday is when the buyer receives the shares and you receive the cash.
Under T+2, the same trade would settle on Wednesday.

Quick history

• Early markets settled more quickly but manually; as volume grew, longer cycles were introduced to accommodate physical certificate transfers.
• Over time: T+5 → T+3 (1990s) → T+2 (2017) → T+1 (2024 for U.S. equities).

Key takeaways

• T+1 means settlement one business day after trade; weekends and holidays are excluded.
• The U.S. equity market uses T+1 to reduce settlement risk and speed access to funds.
• Not all instruments follow T+1 — check settlement terms for bonds, mutual funds, primary offerings, and certain money market instruments.
• Investors should be aware of settlement dates for dividend eligibility, margin obligations, and funding/delivery timing.