Wall Street Moves From T+2 To T+1 Settlement: How It Could Affect Investments, Trading, Tax Decisions

T+1 settlement took effect Tuesday, replacing the prior T+2 system, and financial institutions are adapting to the new standard.

In brief, the shift to T+1 shortens the settlement cycle for all security transactions from two business days to one.

The transition to T+1 was prompted by the 2021 trading frenzy around meme stocks like GameStop Corp. which highlighted the need to reduce counterparty risk and enhance capital efficiency and liquidity in securities transactions, according to Reuters.

This change mandated by the Security Exchange Commission has wide-reaching implications for investors and financial institutions alike.

Though promising greater convenience, the T+1 settlement system also presents new challenges and requires adjustments to existing processes and strategies.

U.S, brokerage firm Charles Schwab Corporation SCHW shared a statement with Benzinga on how this transition will impact its operations and the trading activities of its clients.

US Markets Adopt T+1 Settlement: Schwab’s Perspective

The settlement time change offers increased convenience for many investors but also requires more careful attention to certain investment, trading and tax decisions, a Schwab spokesperson told Benzinga.

“For example, some investors will want to make sure they own shares by specific dates to participate in proxy votes or annual meetings – which T+1 will make easier to ensure. On the other hand, because of T+1, clients will have less time to correct any cost basis decisions made in a trade.”

Once settlement is complete, the cost basis — comprising the total initial investment, any commissions or fees paid and decisions on dividend and distribution collection — is set for tax purposes. Therefore, any adjustments to the cost basis must be made within one business day of the trade, not two.

Additionally, margin account investors who place a trade but need to sell money market funds to cover their purchase must ensure those MMF proceeds are available before or on the same day as settlement to avoid a margin interest charge. This means for margin account trades in bonds, equities or other securities, MMFs must be sold by 4 p.m. ET on the trade date.

Market Tests And Challenges

As reported by Reuters, the market faced a significant test on Wednesday, when trades executed last Friday under the T+2 system, and on Tuesday, the first day of T+1, are settled.

“There will be some growing pains and a few hiccups,” Joe Saluzzi, co-head of equity trading at Themis Trading, told Reuters.

The CBOE Volatility Index (VIX), also recognized as the market fear gauge, spiked as much as 9%, sending major equity indices in the red by midday trading Wednesday in New York.

Blue chip stocks, as tracked by the SPDR Dow Jones Industrial Average DIA, fell 1%.

Another major test is expected on Friday, when MSCI global indexes will rebalance in a quarterly event. This is one of the year’s biggest trading days, and there is concern the market may be strained as participants adjust to the new T+1 system.

Read now: VIX Rises 8%, Treasury Yields Jump, Dow Plunges: Why Is Wall Street Wobbling Wednesday?

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