T+3

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Before March 22, 2017, the settlement cycle for stock trades in the U.S. was T+3, meaning "trade day plus 3 days," referring to the number of days it takes to settle stock. On March 22, 2017, the Securities and Exchange Commission amended Exchange Act Rule 15c6-1 to shorten the standard settlement cycle for broker-dealers transactions from “T+3” to “T+2."[1].

Breaking it down, the T stands for transaction date, which is the day the transaction takes place. The numbers 1, 2 or 3 denote how many days after the transaction date the settlement or the transfer of money and security ownership takes place.[2]

An investor buying a security on Monday was not required to pay for that purchase until Thursday, so in essence, the broker had extended a three-day window or extension of credit to the customer. As a result, the customer could still trade while the earlier transaction/s were being cash settled, while making a good-faith promise to fully pay settled funds or deposit securities within the three-day settlement period and not to sell before making such payment.

Shortening the Settlement Cycle[edit]

In 1995, as automation and other improvements in the settlement and clearing process, the U.S. equity and bond markets moved the trade settlement date from five days after the trade (T+5) to a date of three days after a trade occurred (T+3). By 2000, the securities industry (led by SIFMA predecessor, the Securities Industry Association) began the planning process for a transition to T+1. Although the transition was put on hold, the industry continued to improve in many of the areas identified as critical in the transition to a shorter settlement date.

After the financial crises of 2008-09, global regulators began to push for higher standards in risk management, including the consideration of a shorter settlement cycle. In 2009, the European Commission mad the decision to transition to a T+2 cycle.

In October 2012, Boston Consulting Group (BCG) released the findings of a study, commissioned by the Depository Trust & Clearing Corporation (DTCC), with the guidance of the Securities Industry and Financial Markets Association (SIFMA), which highlighted the costs and benefits of shortening the settlement cycle for securities transactions in the U.S.[3]

In April 2014, DTCC published a white paper advocating the move to T+2, saying such a move would "create greater certainty, safety and soundness in the capital markets."[4] The SEC shortened the settlement of U.S. equity and bond markets from T+3 to T+2 on the first full day of spring, 2017.[5]

References[edit]