T + 1 Settlement Date

Settlement date is an industry term that refers to the date when a trade or derivative contract is deemed final, and the seller must transfer the ownership of the security to the buyer against the appropriate payment for the asset. It is the actual date when the seller completes the transfer of assets, and the payment is made to the seller.

When you buy or sell a stock/bond/ or any other security, there are two critical aspects to it: one is the transaction date i.,e T, and the second is the settlement date. Therefore the abbreviations T+1, T+2, and T+3 refer to the settlement cycle dates of security transactions that happen on a transaction date plus one Day, two days, and three days, respectively.

For example, if you buy 50 shares today, then today’s date becomes the transaction date which is T. This date doesn’t change, as it will always be the date on which you made the transaction.

For determining the T+1 (T+2, T+3) settlement date, the only days counted are those on which the stock market is open. T+1 means that if a transaction occurs on a Monday, settlement must occur by Tuesday. Additionally, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer's account on Thursday.

On February 15, 2023, the US Securities and Exchange Commission (SEC) adopted final rule amendments to Rule 15c6-1 that will shorten the standard settlement cycle for most broker-dealer securities transactions ( US Equities, Corporate Debt and Unit Investment Trusts ) from two business days after the trade date (T+2) to one business day (T+1). Canada will make the change the day before as they seek to stay aligned with their larger neighbor. Broker-dealers will not be required to comply with the amended rules until the T+1 effective date of May 28, 2024.

Shortening the settlement cycle aims to create more efficient markets that serve investors better. The prospective benefits are substantial:

• The amendment is one way in which the Commission is seeking to address recent episodes of market volatility, which include the "meme stock" events of 2021 and the COVID-19 pandemic.

• The Commission believes that shortening the settlement cycle will reduce credit, market and liquidity risks arising from unsettled securities trades.

• This shortened time period between execution and settlement of trades should reduce the number of unsettled trades overall, the time period of exposure to those unsettled trades and potential price movements in the securities underlying unsettled trades.

• Implementing T+1 will also enable investors to access the proceeds from securities transactions sooner than they are able in the current T+2 environment.

• Shortening the settlement cycle will reduce the depository collateral requirements and it will also generate other significant risk reductions, as well as free up capital for other business needs and increase overall operational efficiency.

The T+1 settlement requirements may impact your operations in multiple ways including:

• Lapse Processing - Lapse processing, the process that releases shares to the participant once all vesting criteria are met, might need to be reviewed to support a shorter timeframe. Companies might review their standard fair market value (FMV) definition to see if it can help support a shorter timeframe.

• Payroll - Payroll interactions should be reviewed to support a shorter timeframe. This can include brokerage data feeds, the types of information provided, the feeds to payroll, and any feedback from payroll back to the company or broker.

• Taxes - Tax calculations need to be completed much faster and with less human intervention for timely delivery to the broker where the transaction took place.

• Third-party vendors - Third-party tax calculation vendors will need to ensure timely and automated processing.

• Shares - Share delivery approvals need to be completed quickly so shares are delivered to the broker no later than T+1.

Firms should prioritize the following features and capabilities: 

• To prepare for T+1, buy-side firms will have to implement digital solutions that provide real-time transparency for SSI (standing settlement instructions) and Parallel processes.

• Upgraded settlement systems will have to include automated processes that identify potential problems and automatically initiate a resolution process among all parties to the trade. Review internal operating models to ensure their alignment with the T+1 change.

• The transition to next-day settlement will represent an important step in the industry’s efforts to achieve 100% straight-through processing (STP). Process automation initiatives required for T+1 will span many of the core operational and settlement functions. Under T+1, firms will officially have until 9pm on the day of trade to fix incorrect matches or disaffirm trades, but the real deadline will be much earlier. To meet the new deadlines, trades will need to be matched by about 7pm.

We have compiled a list of links under “External Materials” that will direct you to various industry resources.

SEC Final Rule
DTCC - US T+1 Settlement Industry
DTCC - FAQs
SIFMA: Accelerating the US Securities Settlement Cycle to T+1
SIFMA: Industry Implementation Playbook
ICI Statement on T+1 Settlement Cycle
Canadian Capital Markets Association
Contraparte Central de Valores of Mexico