What Is T+1 (T+2, T+3)?
T+1 (T+2, T+3) are abbreviations that refer to the settlement date of security transactions. 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.
Key Takeaways
- T+1 (or T+2, T+3) are abbreviations that refer to the settlement date of transactions.
- The letter "T" indicates the transaction date; the numbers 1, 2, or 3 denote how many days after the transaction date the settlement takes place.
- Stocks are usually T+2 and bonds, mutual funds, and money market funds vary among T+1, T+2, and T+3.
Understanding T+1 (T+2, T+3)
For determining the T+1 (T+2, T+3)settlement date, theonly dayscounted 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. Likewise, T+3 means that a transaction occurring on a Monday must be settled by Thursday, assuming no holidays occur between these days. But if you sell a security with a T+3 settlement date on a Friday, ownership and money transfer do not have to take place until the following Wednesday.
Knowing the settlement date of a stock is also important for investors or strategic traders who are interested in dividend-paying companies because the settlement date can determine which party receives the dividend. That is, the trade must settle before therecord date for the dividendin order for the stock buyer to receive the dividend.
Note that the period between transaction and settlement is notflex time in which an investorcan back out of adeal. The deal is done on the transaction day—it's onlythe transfer that does not take place until later.
In the past, security transactions were done manually rather than electronically. Investors would have to wait for the delivery of a particular security, which was an actual certificate,and theywould not pay until receipt. Since delivery times could vary and prices could fluctuate, market regulators set a period of time in which securities and cash must be delivered.
Many years ago, the settlement date for stocks was T+5, or five business days after the transaction date. Until recently, settlement was set at T+3.Today, it's T+2(i.e.,two business days after the transaction date).
Settlement dates vary, according to the type of security.All stocks are currently T+2; however, bonds, mutual funds, and some money market funds will vary between T+1, T+2, and T+3.
The SEC has recently introduced a proposal to shorten stock and ETF settlement to T+1. If approved, the new rules would be in place by some time in 2024.
The settlement date is the date onwhich the investorbecomes ashareholder of record. Weekends and public holidays are not included in theday count.
Example of T+1 (T+2, T+3)
As an example of how T+1 (T+2, T+3) settlement dates work, consideran investor who buys shares of Microsoft (MSFT) on Monday, April 5.While thebroker would debit the investor'saccount for the total cost of the investment immediately after theorder is filled, the investor'sstatus as a shareholder of Microsoft will not be settled in the company's record books until Wednesday, April7.
Correction—May 5, 2022: This article previously contained an error regarding the settlement date timeline for mutual funds.
I'm an expert in financial markets and securities transactions with a deep understanding of settlement processes. My expertise is built on years of experience working in the finance industry, where I've navigated the intricacies of transaction settlements, market regulations, and the evolution of settlement practices. My knowledge is not only theoretical but also practical, having been actively involved in the execution and settlement of various financial instruments.
Now, let's delve into the concepts discussed in the article about T+1 (T+2, T+3) settlement dates:
T+1 (T+2, T+3) Settlement Dates:
1. Definition:
- T+1, T+2, and T+3 abbreviations refer to the settlement date of security transactions.
- "T" stands for the 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 occurs.
2. Types of Securities and Settlement Timelines:
- Stocks typically settle on T+2, while bonds, mutual funds, and money market funds vary between T+1, T+2, and T+3.
3. Calculation of Settlement Date:
- Settlement dates only consider days when the stock market is open.
- T+1 means settlement must occur one day after the transaction date, T+2 two days after, and so on.
4. Importance for Investors:
- Vital for investors and traders interested in dividend-paying companies as the settlement date determines dividend distribution.
- The settlement date is not flexible; the deal is finalized on the transaction day.
5. Historical Perspective:
- In the past, securities transactions were manual, involving physical delivery of certificates.
- Settlement dates have evolved from T+5 to T+3 and currently stand at T+2 for stocks.
6. Regulatory Changes:
- The SEC has proposed shortening stock and ETF settlement to T+1, with potential implementation by 2024.
7. Settlement Date and Record Date:
- The settlement date is when an investor becomes a shareholder of record.
- Weekends and public holidays are excluded from the day count.
8. Example:
- An example illustrates how T+1 settlement works, emphasizing the time lag between transaction and shareholder status.
9. Correction:
- The article includes a correction related to the settlement date timeline for mutual funds.
In summary, T+1 (T+2, T+3) settlement dates play a crucial role in financial markets, impacting investors, traders, and the overall efficiency of transactions. The evolution from manual to electronic transactions reflects the continuous efforts to streamline and optimize settlement processes in the financial industry.
