What Is the Settlement Period?

In the securities industry, the trade settlement period refers to the time between the trade date—month, day, and year that an order is executed in the market—and the 澳洲幸运5官方开奖结果体彩网:settlement date—when a trade is considered final.

During the settlement period, the buyer must pay for the shares, and the seller must deliver the shares. On the last day of the settlement period, the buyer becomes the 澳洲幸运5官方开奖结果体彩网:holder of record of the security.

Understanding Settlement Periods

In 1975, Congress enacted Section 17A of the Securities Exchange Act of 1934, which directed the 澳洲幸运5官方开奖结♕果体彩网:Securities and Exchange🐼 Commission (SEC) to establish a nati💜♐onal clearance and settlement system to facilitate securities transactions.

Thus, the SEC created rules to govern the process of trading securities, including the trade settlement cycle. Originally, the settlement period gave both buyer and seller the time to do what was necessary—which used to mean hand-delivering 澳洲幸运5官方开奖结果体彩网:stock certificates or money to the respective broker—to 澳洲幸运5官方开奖结果体彩网:fulfill their part of the trade.

Today, money is transferred instantly but the settlement period remains in place—both as a rule and as a convenience fo⛦r traders, brokers, and investors. Now, most online brokers require traders to have sufficient funds in their accounts before buying stock.

Also, the industry no longer issues paper stock certificates to represent ownership. Although some stock certificates still exist, transactions today are almost exclusively electronic, using a process known as 澳洲幸运5官方开奖结果体彩网:book-entry. Electronic trades are backed up by account statements.

Settlement Period—The Details

The specific length of the settlement period has changed over time. For many years, the trade settlement period was five days. Then in 1993, the SEC changed the settlement period for most securities transactions from five to three 澳洲幸运5官方开奖结果体彩网:business days—which is known as T+3.

Under the T+3 regulation, if you sold shares of stock Monday, the transaction would settle Thursday. The three-day settlement period made sense when cash, checks, and physical stock certificates still were exchanged through the U.S. postal system.

T+2 Settlement Period

In March 2017, the SEC shortened the settlement period from T+3 to T+2 days. The SEC's new rule amendment reflects improvements in technology, increased trading volumes, and changes in the trading landscape. 

Now, most securities transactions settle within two business days of their trade date. So, if you sell shares of stock Monday, the transaction will settle on Wednesday. In addition to being more aligned with current transaction speeds, T+2 can reduce credit and market risk, including the risk of default on the part of a 澳洲幸运5官方开奖结果体彩网:trading counterparty.

Examples of Settlement Dates

Listed below are the SEC's T+2 settlement dates for a number of securities. Consult your broker if you have questions about whether the T+2 settlement cycle covers a particular transaction. If you have a 澳洲幸运5官方开奖结果体彩网:margin account you also should💙 consult your🅠 broker to see how the new settlement cycle might affect your margin agreement.

T-2 settlement dates for:

• Certificates of deposit (CDs): Same day
• 澳洲幸运5官方开奖结果体彩网:Commercial paper: Same day
• U.S. equities: Two business days
• Corporate bonds: Two business days
• Municipal bonds: Two business days
• 澳洲幸运5官方开奖结果体彩网:Government securities: Next business day
• Options: Next business day
• Spot foreign exchange (FX): Two business days

T+1 Settlement

In February 2023, the SEC voted to further reduce the settlement cycle to T+1 from the prevailing T+2 for most securities. That means, trades placed on Monday should be seꦑttled by Tuesday.

The meme-stock buying frenzy in 2021, put pressure on brokers to increase deposits with clearinghouses while they waited for trades to settle in the T+2 cycle. That led to brokers, such as Robinhood, to restrict buying in some stocks. The shortened T+1 cycle, that went into effect May 28, 2024, is intended to avoid such situations in future.

The Bottom Line

The settlement period is the ꧋time between buying a stock or bond, and exchanging money and assets with the seller. In older markets, settlement required several days, as buyers had to exchange paper checks and stock certifi♋cates.

With modern technology, settlement is conducted electronically. Under the T+1 rule, most securities trades settle within one business day.