US Markets Shift To T+1 Settlement Tuesday: How Will It Impact Your Trading Activity?

U.S. financial markets will transition from the traditional T+2 (trade date plus two days) settlement cycle to a quicker T+1 (trade date plus one day) settlement cycle starting Tuesday.

This change, set to take effect Tuesday, is aimed at enhancing market efficiency and reducing various risks associated with securities trading.

Some industry specialists have also highlighted financial costs associated with this shift.

Understanding The Settlement Cycle

The settlement cycle refers to the time between the transaction date and the settlement date: the official transfer of securities to the buyer's account and cash to the seller's account.

Since 2017, the settlement cycle for most securities transactions in the U.S. has been T+2, meaning a transaction settles two business days after the trade date. For example, if you sold shares of Apple Inc. stock on Monday, the transaction would settle on Wednesday.

What Will Change With The T+1 Settlement?

Under the new T+1 settlement cycle, all applicable securities transactions will settle one business day after the transaction date. This means that if you sell shares of Apple stock on Monday, the transaction will settle on Tuesday.

Investors holding physical securities certificates may need to deliver these to their broker-dealer earlier, or through different means, than previously required.

For those holding securities electronically with their broker-dealer, the delivery will occur one day sooner.

Similarly, buyers will need to pay for their securities one business day earlier under the T+1 cycle. This shift may also impact certain provisions of margin accounts.

The T+1 rule will apply to most securities that were under the T+2 cycle, including stocks, bonds, exchange-traded funds, real estate investment trusts, municipal securities and master-limited partnerships traded on U.S. exchanges.

SEC’s Perspective On T+1 Transition

SEC Chair Gary Gensler emphasized the benefits of the T+1 settlement cycle:

"For everyday investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday. Shortening the settlement cycle also will help the markets because time is money and time is risk. It will make our market plumbing more resilient, timely, and orderly. Further, it addresses one of the four areas the staff recommended the Commission address in response to the GameStop stock events of 2021."

Key Risks Mitigated by T+1

1. Credit Risk: Reduces the exposure to counterparty default by shortening the settlement period.
2. Market Risk: Less time between trade execution and settlement decreases vulnerability to price fluctuations.
3. Liquidity Risk: Faster settlements improve capital and resource efficiency.

Financial Impact, Challenges

According to a Bloomberg Intelligence report, the move to T+1 could cost investors approximately $30 billion.

This includes $24 billion in securities lending costs and $6.2 billion in additional costs for investors in foreign-exchange markets.

Larry Tabb, head of market structure research at Bloomberg Intelligence, said the shorter settlement cycle shifts costs from banks and clearinghouses to institutional investors, increases operational pressures and may lead to information leakage.

The latter could cost investors $17 billion annually due to the premature recalling of loaned shares.

"Recalling securities before they're sold increases leakage by not only informing custodians that investors are preparing to sell, but also giving notice to the borrowers, who are already short," Tabb and co-author Nicholas Phillips said.

Bloomberg Intelligence also projected that the T+1 cycle could result in more failed trades, with an estimated cost of $4.1 billion. The urgency to meet the tighter settlement deadline may cause 10% more borrowings to fail, raising fail-funding costs and borrowing rates.

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