On May 28, 2024, the stock market underwent a significant change commonly known as T+1. Understanding two crucial dates in any trade is essential for grasping the impact of the T+1 change. The transaction date, which is the day a trade is executed in the stock market, and the settlement date, which is when the trade becomes official, requiring payment for purchases and the delivery of sold securities. Starting May 28, the settlement date for U.S. securities trades changed from two business days after the transaction to just one business day.
This shift, known as T+1 (trading day plus one business day), will standardize the settlement for stocks, bonds, and related assets to a one-day timetable. The previous two-day settlement, T+2, has been in place since 2017 when the Securities and Exchange Commission (SEC) shortened the period from three days. Most investors will see little impact, as many brokerage firms already require sufficient cash or margin before executing securities orders. However, for some, the time it takes to settle a trade can significantly affect portfolio and trading decisions.
Investors will need to adjust strategies in areas such as tax planning, portfolio rebalancing, and trade timing due to the shorter settlement window. The primary benefit of T+1 is the reduction in counterparty risk, with less time for counterparties to default on their obligations, thereby enhancing market stability, safety, and liquidity. There may be some hiccups during the implementation of this new system, but many believe that once it is in place, it will be positive for the markets overall.
During Bloomberg Markets: The Close, Larry Tabb from Bloomberg Intelligence, stated, “Once everybody gets their operational house in order, I think generally it will be positive. You're going to see that people will get their funds quicker and have their securities faster.” The prospect of investors getting their funds quicker and securities faster is appealing to the average investor and is vital to monitor for a better understanding of the movement of their funds and when they will be available.
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