In a move aimed at benefiting investors and reducing market risk, the Securities and Exchange Commission (SEC) introduced the T+1 settlement rule, which shortens the settlement cycle for most securities transactions from two business days (T+2) to one business day (T+1). This change, effective from May 28, marks a notable shift in the U.S. stock market’s operational dynamics, a transformation not seen in over a century.
- stocks
- corporate bonds
- exchange-traded funds (ETFs)
- municipal securities
- some mutual funds
- limited partnerships that trade on exchanges
The rule is likely a game-changer in the world of stock trading, transforming the investor experience by making it more efficient, secure, and investor-friendly. As the securities market adapts to this new standard, it is expected to usher in a new era of trading that is faster, more reliable, and less risky.
Financial expert Daby Carreras has expressed his views on the T+1 settlement rule, highlighting its potential to positively impact the trading landscape. “I think it’s ultimately going to be a positive thing because it reflects the advancements in technology and makes shorter settlement cycles both feasible and valuable to investors,” Mr. Carreras stated. “The increased trading volumes and changes in the trading landscape that make shorter settlement cycles possible are a byproduct of liquidity and reduced risk.”
Mr. Carreras has been a private wealth manager at Spartan Capital Securities for 15 years and was a New York City comptroller candidate in 2021.
The shift to T+1 settlement ensures that buyers will own their securities sooner, and sellers will have quicker access to their cash. This accelerated settlement process is particularly beneficial in today’s fast-paced trading environment, where every second counts. Moreover, the new rule is expected to mitigate the risks associated with unsettled trades, which can lead to financial losses in volatile market conditions.
However, the transition to T+1 settlement is not without challenges. There is a concern that the shortened settlement cycle could lead to an increase in failed settlements, at least in the short term, as market participants adjust to the new requirements.
In addition, investors will have less time to deposit cash to fund securities purchases, necessitating more efficient fund-transfer mechanisms.
Mr. Carreras also pointed out the potential for increased costs due to the need for additional staff to handle the faster pace of transactions. “If you’re doing a broker-dealer transaction, now you only have one day to get the money from one place in the world to another place in the world,” he explained. “You don’t want to have errors by the computers and things like that. You’re going to have to have more people making sure these things are actually done properly.”
The T+1 settlement rule represents a significant milestone in the evolution of the U.S. securities market. By shortening the settlement cycle, the SEC aims to enhance market safety and efficiency, benefiting investors and market participants alike. While the transition may pose some short-term challenges, the long-term benefits of the T+1 settlement rule are expected to outweigh the costs, setting a new standard for securities trading in the 21st century.
A century ago, trades were done much slower, many times on horse and buggy. The New York Stock Exchange employed the T+1 settlement cycle in the 1920s, while the American Stock Exchange used T+2 before 1953; but as the volume of securities transactions paperwork surged, these settlement periods were progressively extended to T+5 by the late 1960s, overwhelming brokerage firms.
The Black Monday (1987) stock market crash was a catalyst for efforts to shorten settlement times, leading to a reduction in settlement dates to three days (T+3) in most exchanges. In 2017, there was a global shift toward the adoption of T+2. The United Kingdom embraced T+2 in October 2014, followed by the United States in September 2017.
