Trade Settlement Update

Q: T+1 What does it mean?
A: T+1 refers to the industry change in the securities trade settlement timeline. Effective May 28, 2024 (based on the direction of the SEC in conjunction with the FINRA, the MSRB and DTCC) — most securities* (purchases & sales) will accelerate to settle on T+1 (Trade date +1 / next day). Currently the securities trade settlement timeline is T+2 (Trade Date plus 2 days).
* See list of impacted securities at the Appendix / End of these FAQs

Q: When will T+1 come into effect?
A: The accelerated securities trade settlement timeline shift to T+1 (from the current state T+2) will occur on Tuesday, May 28, 2024 (the first trading session after the Memorial Day Holiday on Monday, May 27, 2024).

Q: Why is the securities trade settlement timeline changing / accelerating from T+2 to T+1?
A: The US Securities & Exchange Commission (SEC) in conjunction with industry leading Self-Regulatory Organizations, e.g.. Financial Industry Regulatory Authority (FINRA), The Municipal Securities Rulemaking Board (MSRB), Depository Trust Clearing Corp., etc.) have coordinated to implement the accelerated securities settlement timeline. The reason for this acceleration is to realize optimal settlements – the benefits of which include: a shortened settlement cycle, lower risk, lower client costs associated with the margin and the clients quicker access to funds.

Q: Explain what the securities settlement ‘timeline” is.
A: When purchasing or selling certain securities there is a final date when the securities traded must be paid for by the buyer the securities delivered by the seller. The final date is (for most types of securities*) is an industry agreed standard set forth by the Uniform Practice Code. This “regular way” settlement (most common type of settlement timeline) currently calls for settlement on the second business day from the trade date (T+2) – it’s this securities settlement timeline that is being changed / accelerated to T+1.
* See list of impacted securities at the Appendix of these FAQs

Q: Has the securities settlement timeline changed previously?
A: Yes. With the passage of the Securities Acts Amendments of 1975, Congress empowered the SEC with the authority to change the trade settlement cycle. Eighteen years later, in 1993, the Commission used that authority to again shorten the settlement cycle from T+5 business days to T+3. The SEC then shortened from T+3 to T+2 in 2017. The upcoming change in 2024 will be the first alteration of the settlement timeline since then (on May 28, 2024).

Q: What are some of the experiences and process that will be impacted?
A: In addition to the increase of speed by which the business-as-usual funds would be available and securities would need to be delivered – the shortened securities timeline will impact/accelerate various related processes, included but not limited to the following:

  • failure to receive.
  • fail to deliver.
  • buy-ins.
  • sell-outs.
  • certain Margin calls (e.g., Fed Calls)

Q: what is the difference between the “trade date” and the “settlement” date?
A: Trade date is the day your order to buy or sell a security is executed; settlement date is the day your order is finalized and on which the funds or securities to cover that trade must be delivered. Currently, settlement date occurs two business days after trade date, but recent rule amendments from the Securities and Exchange Commission (SEC) and conforming FINRA rule change (effective May 28, 2024) will make the securities settlement timeline one day shorter (changing from T+2 to T+1). Beginning on May 28, 2024, the new standard for settlement will become the next business day after a trade, or T+1.

Q: Can you share an example of a trade and how it will change?
A: Current state: If a client buys a security such as a stock or bond*, the client must deliver payment no later than two business days after the trade is executed. When a client sells a security, he/she/they must deliver the sold security no later than two business days after the sale. For example, if the client sold shares of a stock on Tuesday, the transaction would settle on Thursday. Future state: Under the new T+1 security settlement timeline — most securities transactions will settle on the next business day following their trade date. Using the example from above, if you sell shares of a stock on Tuesday, the transaction will now settle on Wednesday.
* See list of impacted securities at the Appendix of these FAQs

Q: What securities* are impacted by this change?
A: The T+1 rule amendment applies to the same securities transactions currently covered by the T+2 settlement cycle. These include transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange*. The switch to T+1 also means that these transactions will align with the settlement times for options and government securities, which currently operate on a next-day settlement schedule.
* See list of impacted securities at the Appendix of these FAQs

Q: Tell me more about Margin implications?
A: Though margin requirements in margin accounts are computed on a trade-date basis and aren’t changing, the payment period for Regulation T (initial) margin calls also has been reduced by one day to T+3. This means that the change in settlement date doesn’t change the time periods related to meeting maintenance margin calls, as these are set based on the date the call occurred.

Additional Industry Information:
SEC.gov | New “T+1” Settlement Cycle – What Investors Need To Know: Investor Bulletin

Appendix
List of impacted securities.

T+1 Accelerated Settlement Product Scope:

The products subject to the shortened settlement cycle include equities, corporate and municipal bonds, unit investment trusts, and financial instruments comprised of these security types. The following list may include products that the industry has identified as in scope for T+1 settlement. However, this list is not meant to be an exhaustive list of products that could be impacted by T+1 implementation. This list is only meant to be used as a guide and individual firms need to make their own determination on specific securities and leverage their knowledge and experience in transiting to T+2.

T+1 Impacted Product Scope
Equities
Common Stock
Common Stock Real Estate Investment Trusts (REIT)
Convertible Common Stock
Equity Units
Equity Derivatives other than Security-based Swaps
Preferred Stock
Preferred Stock REIT
Tender Rate Preferred Stock
Auction Rate Preferred Stock
Convertible Preferred Stock
Preferred Perpetual
American Depositary Receipts (ADR)
Exchange Traded Funds (ETF)
Exchange Traded Products
Exchange Listed Limited Partnerships
Exchange Traded Notes
Mutual Funds
Fixed Income
Corporate Debt
Global Corporate Bonds
Medium-Term Notes
Corporate Debentures
Corporate Debt Derivatives
Corporate Auction Rate Notes
Convertible Corporate Debt
Debt Units
Zero Coupon Bonds
Pass Thru Certificates (Corporate Debt)
Zero Coupon Denominated in Initial Principal Amount
Bearer/Callable Zero-Coupon Bond
Equipment Trust Certificates (Corporate Debt)
Demand Notes
Corporate Other Tax Exempt
Corporate Insured Custodial Receipts
Credit Linked Notes
Commodity Linked Notes
Municipal Debt
Municipal Auction Rate Notes
Municipal Insured Custodial Receipts
Index Linked (Municipal Bond)
Municipal Variable Mode Obligations (VMO)
Municipal Option Call Rights
Municipal Other Tax Exempt
Municipal Notes
Municipal Amortized Issue
Municipal Insured Custodial Receipts
Stepped Coupon (Municipal Bond)
Municipal Amortized Issue
Municipal Bonds
Mortgage and Asset-Backed Security (MBS & ABS)
Global ABS
CMO Floater (non-agency)
Collateralized Mortgage Obligations (CMO) (non-agency)
Sinkable Floaters (ABS)
Collateralized Loan Obligations
Mortgage-Backed Securities (non-agency)
Non-CMO/ABS Amortizing Issues
Derivatives
Warrants
Rights
Money Market Instruments
MMI Institutional Certificates of Deposit
Certificated Money Market – Periodic Payer
MMI Medium Term Notes
Certificated Money Market Instruments
MMI Medium-Term Bank Notes
Commercial Paper (Money Market)
MMI Municipal Commercial Paper
MMI Bankers’ Acceptance Notes (BA)
MMI Municipal VRDO/CP
MMI Corporate Commercial Paper
MMI Short-Term Bank Notes
MMI Corporate VRDO/CP
MTN Medium Term Notes
MMI Deposit Notes
MMI Discount Notes
Miscellaneous
Tender Rate Note
Unit Investment Trust (UIT)
When Issued Securities [1]
Futures
Corporate Insured Custodial Receipt
Limited Partnership
Certificate of Deposit
Structured Products
Private Investment Public Equity (PIPE)

**Participants should inquire with the DTCC as it relates to securities that are “DTCC Eligible” that would settle on T+1.**

The final rule on T+1 applies to securities that do not carry an exemption from 15c6-1(a). The final rule defines the term “security” in Section 3(a)(10) of the Exchange Act as, inter alia, equities, corporate bonds, UITs, mutual funds, ETFs, ADRs, [], and options.

Application of Rule 15c6-1(a) extends to the purchase and sale of securities issued by investment companies including mutual funds, private-label mortgage-backed securities, and limited partnership interests that are listed on an exchange. The traditional definition of a security (15 U.S. Code § 77b) would include in general, any interest or instrument commonly known as a security. Importantly, the Commission has exempted securities-based swaps from T+1 via codified language in 15c6-1(b). The Commission also exempted firm commitment offerings priced after 4:30 PM from T+1 settlement in the final rule via codified language in 15c6-1(c). The Commission also exempted insurance products from T+1 settlement in the final rule.

[1] When issued” securities trade when they are announced but not yet issued. However, when they are issued, they settle regular way