Coming Soon: Speedier Settlement of Market Transactions

May 20, 2024
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Beginning next Tuesday (May 28), U.S. markets will cut the period for settling certain transactions in half, moving from the current "T+2" settlement period to "T+1." The shortened settlement period will apply to trades of:

• Exchange-traded funds (ETFs),
• Stocks,
• Bonds,
• Municipal securities, and
• Real Estate Investment Trusts (REITs).

For the investment types listed above, the change means money and shares will change hands on the next business day after a buy or sell order. For example, a transaction made on a Wednesday will settle on Thursday rather than Friday.

Traditional mutual funds and government bonds already settle on a T+1 basis.

An upside of the timing change is that if you sell an ETF (or a stock, bond, etc.), the proceeds will settle in your account more quickly than before. Sometimes, that will speed up the ability to sell one investment and buy another.

We'll have to see how this plays out with specific brokerage firms, but soon, you should be able to sell an ETF and use the proceeds to buy a traditional mutual fund on the same day. In the past, you had to wait one business day because of the settlement mismatch between traditional mutual funds and ETFs, as we explained in a 2023 article.

Since ETFs have T+2 settlements and traditional mutual funds have T+1 settlements, you may not sell an ETF and immediately use the proceeds to buy a traditional fund. The money from the sale of the ETF technically isn’t available yet — settlement requires two days.

Therefore, you must wait one business day between selling an ETF and buying a traditional fund so that both transactions will settle on the same day. For example, you could sell an ETF on a Monday and use the proceeds to purchase a traditional fund on a Tuesday because both transactions would settle on Wednesday.

With the new T+1 timeline for ETFs, the one-day delay should no longer be necessary. (Again, we must wait to see how specific brokerage firms handle this.)


As you might imagine, cutting settlement times by half creates logistical headaches for the investment industry, but they face a regulatory mandate from the U.S. Securities and Exchange Commission. The SEC says the shortened settlement period will "promote investor protection, reduce risk, and increase operational and capital efficiency."

However, some in the industry warn that the new settlement system could go awry — at least initially. Bloomberg offers a deep dive into the challenges of implementing the new system and the problems it will create for overseas investors with money in U.S. investments.

An immediate implementation challenge is that the new settlement timeline takes effect after a holiday weekend: next Monday is Memorial Day in the U.S. and the Spring Bank Holiday in the UK. Some industry players warn that moving to the shorter settlement timeline right after a holiday is asking for trouble.

Further, the T+1 changeover will occur just two days before research firm MSCI rebalances several of its indexes, which is "typically one of the largest trading days of the year," according to Gerard Walsh of Northern Trust, quoted in the UK's Financial Times. That extra trading activity, he warns, will place additional stress on the faster-settlement system.

A history of increasing speed

If your investing experience goes back more than eight years, you may recall that most trades required at least three business days to process (T+3). That turnaround time was considered quick compared to the U.S. market situation that existed for a century and a half. Settlements routinely took a week or more.

Fifth Third Bank Institutional Services offers an overview of the advances in settlement efficiency.

The New York Stock Exchange formally began trading in 1817 — and for the next 150 years, physical delivery [of stock certificates and money] was made by foot, ship, horse, train and plane.

Trade settlement times varied greatly until 1968 when Wall Street was drowning in paper from a surge in trading, which caused the exchange to close often on Wednesdays to settle trades. The gap between the initial transaction and full settlement allowed for the time the postal service or New York couriers to deliver the stock certificate and funds.

As technology and communication improved in the 1970s and 1980s — particularly with the advent of fax machines and the founding of the Depository Trust [Company] in 1973 — settlement periods began to shrink from five days to three business days...(or T+3, which means trade date plus three days).

T+3 settlement had been the standard for most securities trades since 1993. By 2017, major financial markets had adopted T+2, a two-day settlement....

[Today,] machine-learning has dramatically changed the settlements process. This technology — which analyzes data to find patterns and improve on them — makes it possible for most trades to be settled through what’s known as straight-through processing, whereby trades are executed, confirmed and settled without human input.

Even so, trades can and do fail — at which point they need to be settled manually.

Faster still?

Whatever happens next week, T+1 is on its way. And SEC Chair Gary Gensler has hinted that technological advancements may make same-day settlement (T+0) possible.

Whether or not that is a good thing, time will tell.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

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