T+2 and Counting

Published: August 24, 2017

T+2 and counting?
Ah, remember the “good old days” when trade settlement timing was a leisurely T+5? In other words, from the time a security trade was executed, if you were the buyer, you had a full five business days to pay for your securities. Of course, you also didn’t take ownership of the securities until that time. On the flip side, if you sold securities, you didn’t receive payment until the fifth day, so if you needed cash for any reason, you really had to plan ahead. This extended process made more sense when paper stock certificates and paper checks were delivered by couriers and extensive manual administrative activity and reconciliations were needed.

One thing to note; the clock doesn’t start running until the day after the trade and it counts business days only.  In other words, under T+5, if you traded on Thursday, the clock started on Friday, and the trade settled on the next Thursday, a full calendar week later.

Getting faster all the time
Then in 1995, the SEC shortened the settlement cycle significantly to T+3.  Fast forward twenty-two years (and many technological advances) later, and welcome to T+2. The SEC announced in March 2017 that it would move to T+2 settlement for most securities trades, effective September 5, 2017. This was based on an extensive study and set of recommendations from an Industry Steering Committee (ISC) composed of approximately 20 participants across key market segments.    

Good for the markets and investors
Recommendations were based on comprehensive research by the Boston Consulting Group and found that moving to faster settlement periods will enhance efficiency and reduce risk for the markets overall and for market participants. It also makes the U.S. more consistent with other markets that are moving or have already moved to T+2, including London, most European Union markets, Hong Kong, South Korea and Australia, or are contemplating a move, as in Canada and Japan. And don’t worry, transactions in the huge U.S. Treasury securities market already settle on a T+1 basis, so this acceleration to T+2 should not present great difficulties.    

What does it all mean for you?
You may not even notice it, but there are a couple of items to note. If you are selling a security, you’ll receive payment, and have cash available, one day sooner than previously. On the other side of the transaction, however, if you’re the purchaser, your payment will be due a day sooner. You may see that we effect sales in your account to fund purchases of securities on the same day to meet the new timing requirements. As always, Klingenstein Fields Advisors will be watching carefully to make sure transactions go smoothly.

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.